What to do if your pension value suffers just before retiring


As with all investments, the value of your pension can fall as well as rise, there are no guarantees. When retirement is a few years off, this often isn’t something to worry about; you still have an opportunity to recoup the losses. However, if it happens at the point of retirement, it can be a concern.

In 2018, many pension values fell during turbulent market conditions but are now starting to make a recovery. However, it’s impossible to know what will happen in the future. According to Money Facts, pensions suffered their biggest losses since the financial crisis of 2008 last year but are now back on track. The average pension fund generated returns of 6.7% in the first quarter of 2019.

With investment volatility in mind, though, it’s important to understand how a dip in value could have an impact on your future. Depending on your income preferences at retirement, accessing your pension at a low point could seriously affect your income. For instance, purchasing an Annuity with your retirement savings when they’ve dipped will mean you receive less for the rest of your life.

What can you do if you’re worried about dips in the value of your pension?

1. Take a step back and look at the long term

When you see the value of your pension has fallen, how far back are you looking? It can be disheartening to see investments haven’t performed as well as you’d hoped in the last quarter, but saving into a pension shouldn’t be about the short term. Taking a look at how your pension has performed will give you a far better idea of how worthwhile your contributions have been, especially when you factor in tax relief and employer contributions.

Of course, ideally, you’d be withdrawing your pension when it’s at its highest point. However, looking at the bigger picture rather than a recent snapshot can put it into perspective.

2. Reduce exposure to volatility

If you have concerns ahead of retiring, taking a look at your current risk profile and reducing exposure to volatility is an option.

Many funds will automatically change your asset allocation at a set point. For instance, when you first start saving into a pension at the start of your working life, you’re likely to be invested in a mix of different assets, including some that have a higher risk. This is because you have a longer timeframe to recover from short-term value decreases and growth is typically a higher priority than preservation. However, as you reach five years from the traditional retirement age, your savings will slowly be moved into assets deemed low risk.

Whilst reducing exposure may be automatic, it’s worth checking your current investment profile to ensure it aligns with what you want. The retirement date set by funds is usually linked to the State Pension age, which, again, may not match your plans.

3. Delay accessing your pension

Historically, when you look at investment markets, they do recover. So, delaying accessing your pension could provide a solution. As with all investments, selling crystallises the losses, whilst holding gives you an opportunity to see growth in the future.

If it’s an option you’d consider, the first thing to do is see if this is a viable option. Would you delay retiring to give markets time to recover? Or do you have other assets you could use? You’ll still need an income so it’s important to understand how you’d continue to meet financial commitments, as well as paying for the lifestyle you want.

Another area to consider is the time frame. How long would you put off your initial plans for? Waiting for a recovery that’s out of your control can be stressful and it may take longer than anticipated, affecting plans you’ve been looking forward to. In some cases, accepting the dip and adjusting plans where necessary may be a better solution.

4. Only withdraw a portion of your pension

Pension Freedoms means you have more flexibility in how you access your pension. So, if the above option isn’t viable for you, you could withdraw a portion of your pension and leave the remainder invested, hopefully, to deliver growth.

You have a few different options here. You could take a lump sum from your pension, leaving the rest invested. Usually, only 25% of a lump sum withdrawn from your pension is tax-free, the rest may be liable for Income Tax. Alternatively, you could use Flexi-Access Drawdown to take an adjustable income, with the sum you don’t withdraw being invested to suit your risk profile. With this option, you can also take a single, tax-free lump sum of up to 25%.

By leaving some of your pension invested you can start your retirement as planned, but remain invested in the market to hopefully deliver returns over the long term.

The four above options are each worth considering but no single solution will suit everyone. How you decide to respond to a fall in pension value should depend on a range of factors, such as your priorities and other assets. If you’d like help understanding the income your pension will give on planning for retirement, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.