Does market volatility affect your pension choices?

The good news is that Pension Freedoms, introduced in 2015, means you have more choices in how and when you access your retirement savings.

4 min read

Market volatility around the time you plan to retire may affect the value of your pension but that doesn’t mean your overall plans have to be adjusted. However, it’s important that you understand the impact volatility could have. The impact will depend on how you intend to access your pension.

1.     Taking a lump sum

Once you reach retirement age, it is possible to take your pension through lump-sum withdrawals, often referred to as Uncrystallised Pension Lump Sums (UFPLS). This method allows you to choose an amount to withdraw and 25% of this amount would be tax-free. The remaining 75% of the withdrawal would be subject to income tax.

This option has the greatest flexibility but does come with some risks. Whilst you can choose to withdraw the entire pension as a lump sum, this isn’t likely to be appropriate for most retirees. Withdrawals could push you into a higher Income Tax bracket and the additional income and capital could affect your access to means tested state benefits.

As a result, taking lump sums may not be the most efficient way to access money, depending on your circumstances.

2.     Purchasing an Annuity

An Annuity is a product you buy with your pension savings that delivers a guaranteed lifetime income. As a result, if the value of your pension has fallen, you may find that the income you can purchase is now lower. But it is an option that can provide financial security throughout retirement.

The amount paid out will depend on the Annuity rate. For example, a 5% Annuity rate would pay out £5,000 every year for every £100,000 initially paid.

The Annuity rate you’re offered varies depending on a range of factors, including your age and health. You can also choose to purchase a joint Annuity, ensuring your partner would continue to receive an income if you passed away first, or one that increases alongside inflation to maintain spending power. These options would typically mean a lower level of income to begin with.

If you’d like to use an Annuity to fund retirement, you’ll need to assess how recent volatility has affected your overall pension value. This means you’re able to see what Annuity rates mean in terms of income.

Take some time to shop around, different providers will offer varying rates. Once you purchase an Annuity, the decision is usually irreversible and the funds used to purchase the plan will no longer be available to you. You may also want to consider whether you want to use part of your pension funds to purchase an Annuity to cover essential expenditure and keep the remaining pension funds invested.

The good news is that with a guaranteed income, you won’t have to worry about market volatility affecting your level of income in retirement.

3.     Using Flexi-Access Drawdown

Flexi-Access Drawdown allows you to take a flexible income that suits you, usually, the remainder will stay invested until you make another withdrawal.

This is the option where investment volatility can have the biggest impact. As your savings remain invested, you need to be aware of how your investments have performed. Continuing to take the same level of income during a downturn in market prices, as you did previously, will mean you need to sell more units to receive the same amount of income. This can deplete your pension more quickly than expected if you hadn’t considered it beforehand.

As you’re responsible for how and when you access your pension, you also want to ensure it lasts throughout your life, which will undoubtedly include some periods of short-term volatility. Therefore, you should consider downturns as part of your retirement plan.

Remaining exposed to the markets isn’t all negative though. Historically, markets have recovered over the long term. Keeping your pension invested means you have an opportunity to benefit from a recovery as well as long-term gains.

Creating a retirement plan

How and when is the ‘right’ time to access your pension will vary between retirees. It’s a decision that should focus on your retirement goals and long-term plans.

Remember, you don’t have to access your pension as soon as it becomes available. If you don’t need the savings yet, leaving your pension invested can give your investments a chance to recover in the long term and perhaps grow further.

You also don’t have to choose one of the above options exclusively. You can mix and match the options to suit you. For instance, you could withdraw your 25% tax-free lump sum at the start of retirement, use a portion to create a base income with an Annuity, and use Flexi-Access Drawdown to access the remainder at different points.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

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.