Retirement planning: Why your state pension may be especially useful in coronavirus crisis
The state pension can be claimed by eligible people once they reach state pension age. That said, this may not be in line with the point at which a person retires from their career. However, for some approaching and entering retirement, claiming the state pension will be on their radar.
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It’s something which Emma Byron, Managing Director of Legal & General Retirement Income, has addressed, while sharing her retirement expertise amid the coronavirus crisis.
As the uncertainty caused by the COVID-19 pandemic continues, the economic downturn caused by the virus has highlighted the need for a resilient retirement plan more than ever before, Ms Byron has said.
With the stock market reacting to business disruption across the globe, many soon-to-be retirees have been taking a closer look at their retirement, and reconsidering how to achieve a reliable source of retirement income.
With that in mind, Ms Byron has suggested some steps people may opt to take, in order to ensure their finances are as robust as possible as they near, and enter, retirement.
1. Get your house in order
“Before making any decisions on what to do next, it is vital that you take stock of your current assets and get an idea of what impact market shocks have had on your investments,” Ms Byron said.
“The extent of any fall will be very dependent on the risk level of the funds you are invested in.
“If you are close to retirement, you may well have been moved into funds which have a lower risk profile, while if retirement is still some way off, you could be heavily exposed to equities.
“Being aware of how the pandemic has hit your investments and factoring this information into your plan, is the crucial first step.”
2. Don’t panic
“If you have reviewed your current assets and noticed that your investments have dipped, it is important not to panic.
“When markets are uncertain, or people see their investments have taken a hit, the urge can be to switch into cash or less risky assets like bonds.
“This reaction is part of human nature, and while it may feel like a sensible approach, in reality it means there is no chance for your investments to recover and you therefore crystallise investment losses that are currently only on paper.
“If you have time on your side, you should try to ride it out and let your investments recover over time.”
3. Plan, plan, plan
“Instilling financial resilience is not something that can be done overnight, it requires sustained attention and effort.
“Market shifts, like those experienced in recent weeks, really highlight the importance of having a plan in place, with some room for flexibility should the unexpected happen.
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“As part of the planning stage, you should see if there are any potential stressors, or if losing a specific source of income would place you under significant financial pressure.
“There are so many options out there now, and thousands of people are entering their retirement without a strategy in place.
“Not having a plan could leave you short of funds in later life, or even see you become overly modest with the amount you access.
“Either way, the result is the same: you can’t enjoy the retirement you really want.
“If you’re unsure what to prepare for, talk to a financial adviser, or visit the Pension Wise website for all sorts of useful information.”
4. Get peace of mind
With pension savings affected during the crisis, Ms Byron has highlighted how other forms of income may be useful – be that savings, a Defined Benefit scheme, or the state pension – if the person is state pension age, that is.
“An unexpected market shift like this re-enforces the importance of having some base-level of income secured,” she said.
“Suddenly not being able to rely on specific income strategies, such as your investments or property, can cause anxiety, so it is sensible to seek income streams that provide some financial security.
“Your state pension or Defined Benefit scheme for example, are reliable sources of income you can turn to in times of market turmoil.
“Or, if you’re thinking about drawing down your pension in the future, you could look at buying an annuity before you retire, to provide you with a secure base level of income should your pension pot experience a significant drop in value.”
5. Start saving a cash buffer, now
“The stock market volatility caused by COVID-19, as well as the emergency interest rate cuts enacted by the Bank of England, have shown that, in extreme cases, pronounced market drops can affect everyone in retirement.
“That’s why it’s sensible to always keep a cash buffer maintained, so that you have something to fall back on if your other income sources are affected by external events.
“One way to do this could be to use a fixed-term zero income annuity, which can be surrendered or partially surrendered if for some reason you really need it.
“A cash buffer can allow you to weather a short period of stock market volatility (when returns may be more erratic) and keep you from having to take money out of your invested pot, so that your invested capital remains intact.”
Ms Byron added: ‘‘With the recent shifts we’ve seen in the market, it’s more important than ever that people are taking a critical look at their future income strategies, and taking stock of how all of their available assets will play a part in funding their retirement.
“For those of us that still have time to plan for our retirement, the time to instil financial resilience is now’’.
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