If you have a pension, there’s a high probability that a significant part of it will be invested in the stock market. However, if the markets fall sharply, as has happened recently, the size of your pension pot is also likely to have dropped in value. This is especially so, if your pension fund has a medium to high exposure to shares.
The question on many people’s lips is, how will my pension and retirement plans be impacted? This is a very pertinent question, but there are a number of possible answers, as the level of impact on your pension fund will partly depend on what type of pension arrangement you have placed your money in.
The different types of pension
There are several different types of pension arrangements, but in essence, these boil down to three main types: the defined benefits (or final salary scheme), money purchase pensions (this includes that vast majority of workplace pensions) and annuities.
Additionally, the potential effects of the stock markets’ turmoil on income drawdown from your pension pot before crystalising it into an annuity, could also be affected,
A: Money purchase pensions
These type of pensions (also known as defined contribution pensions) are by far the most common, with both your contributions, together with your employer’s, invested in a fund, which spreads the cash across a range of assets such as company shares, government bonds/securities and property. These funds will usually be actively managed to handle the ups and downs of the market and tend to use fail-safe lower-risk investments to move your pension pot into, once you reach the last five years before your planned retirement date.
The on-off nature of many of Trump’s tariff announcements, is the root cause of the world’s stock markets, including our own, becoming extremely volatile in recent weeks. Whilst it is understandable that many of you are worried about this, fear not, as the truth is that short-term ups and downs are a normal part of long-term investing.
Jason Hollands, managing director at wealth manager Evelyn Partners, stated recently: ‘Amid uncertainty and periods of turbulence, sometimes the best course of action is to take a few deep breaths, sit tight and wait for the dust to settle.’ Mr Hollands advised pension investors not to worry, even if they’ve seen a noticeable dip in the value of their pension pot in recent weeks and added: ‘In fact, your contributions could be picking up equities more cheaply, which is one of the benefits of regular investing into a pension.’
B: Final salary pensions
This type of pension, also known as defined benefits pensions, are becoming much less common these days due to the cost to the employer. These schemes are typically based on your salary at retirement and your years of service. So, if you’re luckily enough to be in such a scheme which will provide you with a guaranteed income for life, do not worry, as this type of pension is not directly affected by short-term market movements.
C: Annuities
A pension annuity is a product that converts your pension pot into guaranteed regular income for the rest of your life, no matter how long you live. With a pension annuity, you’ll know exactly how much you’re getting, come rain or shine, which may not be the case with other retirement income options.
There are however a number of different options to consider, once you have access to your crystallised pension pot. The main types are:
- Lifetime annuity: This is another name for a standard pension annuity, which regularly pays you a guaranteed sum for the rest of your life. They usually end when you die unless you’ve selected death benefits such as a guaranteed minimum payment period.
- Joint lifetime annuities: These regularly pay you a guaranteed sum for the rest of your life, then pay out to a spouse or civil partner if they outlive you, but typically at 50% of the original pension.
- Enhanced annuities: These pay out at a higher rate than standard annuities but are usually time limited and are mainly for individuals with a particular health issue, that is likely to shorten your life.
Another consideration for anyone considering using their pension pot to buy an annuity, is that with significant interest rate cuts expected later this year, you may choose to lock in while rates remain high. This could be an excellent option as current annuity rates are at their highest level since unisex annuity pricing was introduced in 2012.
There are currently a number of annuities in the market that are paying around 8% of the annuity’s value, so a 65-year-old with a £100,000 pension annuity at present, can get up to £8,000pa with a five-year guarantee.
D: Income drawdown
This is a hybrid option which allows you to take a lump sum from your pension whilst keeping the rest invested. If markets fall, the value of your investments can drop and withdrawing money during these periods can reduce your pot.
Most prudent independent final advisers or IFA’s, recommend using a ‘natural yield approach’. This means only taking the income your investments produce, rather than selling units to generate cash. This can help your pension last longer, but if this option is chosen it would be sensible to keep two to three years of essential expenses in an easy-access account to supplement your income during times of market volatility, to avoid making inroads into your capital.
Final thoughts
So, those of you with say five years plus until retirement there is no need to worry. However, if you’re getting close to retirement, you may be in two minds as to whether or not now is the right time to start drawing money from your pension. Some of you may opt to wait until markets feel more stable, alternatively, you may prefer to take your money and run, by guaranteeing your future income by purchasing an annuity.
Rather than spending countless hours searching the internet for advice, which can and will vary, I would urge you to get independent pension advice, which will not come from the company that holds your pension pot. These regulated independent advisers, or IFA’s, are able to advise and sell products from any provider right across the market and therefore provide you with the very best advice and products.
There are various websites to connect you with an IFA in your area, such as VouchedFor and the Financial Advisor Bureau. Both of these organisations provide a free service that connects you with a local FCA regulated Financial Advisor for an initial free consultation. If you want a wider choice try Martin Lewis’s website at http://moneysupermarket.com/
Accountant’s view
I realise that today’s Blog merely scratches the surface of this vital aspect of your finances, so by all means do your own research. But whatever you do, before committing, take independent advice. Finally, my thanks go to those lovely people at Which Magazine whose article on 14th April inspired today’s Blog.
Will Trump’s tariffs have an impact on your pension?
If you have a pension, there’s a high probability that a significant part of it will be invested in the stock market. However, if the markets fall sharply, as has happened recently, the size of your pension pot is also likely to have dropped in value. This is especially so, if your pension fund has a medium to high exposure to shares.
The question on many people’s lips is, how will my pension and retirement plans be impacted? This is a very pertinent question, but there are a number of possible answers, as the level of impact on your pension fund will partly depend on what type of pension arrangement you have placed your money in.
The different types of pension
There are several different types of pension arrangements, but in essence, these boil down to three main types: the defined benefits (or final salary scheme), money purchase pensions (this includes that vast majority of workplace pensions) and annuities.
Additionally, the potential effects of the stock markets’ turmoil on income drawdown from your pension pot before crystalising it into an annuity, could also be affected,
A: Money purchase pensions
These type of pensions (also known as defined contribution pensions) are by far the most common, with both your contributions, together with your employer’s, invested in a fund, which spreads the cash across a range of assets such as company shares, government bonds/securities and property. These funds will usually be actively managed to handle the ups and downs of the market and tend to use fail-safe lower-risk investments to move your pension pot into, once you reach the last five years before your planned retirement date.
The on-off nature of many of Trump’s tariff announcements, is the root cause of the world’s stock markets, including our own, becoming extremely volatile in recent weeks. Whilst it is understandable that many of you are worried about this, fear not, as the truth is that short-term ups and downs are a normal part of long-term investing.
Jason Hollands, managing director at wealth manager Evelyn Partners, stated recently: ‘Amid uncertainty and periods of turbulence, sometimes the best course of action is to take a few deep breaths, sit tight and wait for the dust to settle.’ Mr Hollands advised pension investors not to worry, even if they’ve seen a noticeable dip in the value of their pension pot in recent weeks and added: ‘In fact, your contributions could be picking up equities more cheaply, which is one of the benefits of regular investing into a pension.’
B: Final salary pensions
This type of pension, also known as defined benefits pensions, are becoming much less common these days due to the cost to the employer. These schemes are typically based on your salary at retirement and your years of service. So, if you’re luckily enough to be in such a scheme which will provide you with a guaranteed income for life, do not worry, as this type of pension is not directly affected by short-term market movements.
C: Annuities
A pension annuity is a product that converts your pension pot into guaranteed regular income for the rest of your life, no matter how long you live. With a pension annuity, you’ll know exactly how much you’re getting, come rain or shine, which may not be the case with other retirement income options.
There are however a number of different options to consider, once you have access to your crystallised pension pot. The main types are:
Another consideration for anyone considering using their pension pot to buy an annuity, is that with significant interest rate cuts expected later this year, you may choose to lock in while rates remain high. This could be an excellent option as current annuity rates are at their highest level since unisex annuity pricing was introduced in 2012.
There are currently a number of annuities in the market that are paying around 8% of the annuity’s value, so a 65-year-old with a £100,000 pension annuity at present, can get up to £8,000pa with a five-year guarantee.
D: Income drawdown
This is a hybrid option which allows you to take a lump sum from your pension whilst keeping the rest invested. If markets fall, the value of your investments can drop and withdrawing money during these periods can reduce your pot.
Most prudent independent final advisers or IFA’s, recommend using a ‘natural yield approach’. This means only taking the income your investments produce, rather than selling units to generate cash. This can help your pension last longer, but if this option is chosen it would be sensible to keep two to three years of essential expenses in an easy-access account to supplement your income during times of market volatility, to avoid making inroads into your capital.
Final thoughts
So, those of you with say five years plus until retirement there is no need to worry. However, if you’re getting close to retirement, you may be in two minds as to whether or not now is the right time to start drawing money from your pension. Some of you may opt to wait until markets feel more stable, alternatively, you may prefer to take your money and run, by guaranteeing your future income by purchasing an annuity.
Rather than spending countless hours searching the internet for advice, which can and will vary, I would urge you to get independent pension advice, which will not come from the company that holds your pension pot. These regulated independent advisers, or IFA’s, are able to advise and sell products from any provider right across the market and therefore provide you with the very best advice and products.
There are various websites to connect you with an IFA in your area, such as VouchedFor and the Financial Advisor Bureau. Both of these organisations provide a free service that connects you with a local FCA regulated Financial Advisor for an initial free consultation. If you want a wider choice try Martin Lewis’s website at http://moneysupermarket.com/
Accountant’s view
I realise that today’s Blog merely scratches the surface of this vital aspect of your finances, so by all means do your own research. But whatever you do, before committing, take independent advice. Finally, my thanks go to those lovely people at Which Magazine whose article on 14th April inspired today’s Blog.
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