Personal Finance

Can you still afford to take an early retirement if your pension has recently plummeted?


Recent market chaos has forced workers looking forward to retirement to rethink their plans after their pensions were hit. 

While those with ‘defined benefit’ (DB) schemes will be protected from recent financial volatility, workers with a more common ‘defined contribution’ (DC) scheme may be at more risk.

DB schemes’ income is guaranteed irrespective of market conditions, even if their employer goes bust. But DC schemes are at the whim of stock and bonds markets.

Workers who are very close to retirement should have been largely protected from coronavirus-related market falls, as schemes’ default strategies remove risk the nearer you are to a specified age. But those who planned to retire early, or who handle investments themselves, may have suffered a hit of 20pc or more.

So what does this mean for people who had planned to take early retirement, and how can they boost their position?We asked two financial planners to describe the next steps to take for those faced with a hit to their pensions.

Limit how much you take out of your pension

Anyone who is approaching retirement and looking to draw down from their pensions should avoid taking out any more than they need. The more they can leave invested, the more they will benefit over time when the market rises.

Ray Tammam of Fairstone, a wealth manager, said: “When choosing to draw down on a pot after a significant market fall, there is a danger known as ‘pound cost ravaging’.”

This occurs when money is drawn out from a reduced pot on a regular basis, resulting in the pot having to recover significantly more than it has fallen to get back to the same level.

The rule for financial planners is to take 4pc per year in income from your pension. Those aiming to earn £20,000 per year from their pension (pre-tax and excluding any state pension), would need a pension of at least £500,000 to do this.

However, after the recent market falls it is possible that people who previously had this amount may have a pot of £450,000 or less now.  By continuing to take the same amount, it could leave them short in the future. Ensure you keep your pot at a healthy level by sticking to the 4pc rule.

Supplement your income with cash savings

If you can, use any cash savings rather than taking more money out of your pension. This way, you can keep the pension pot as big as possible to make the most of its growth when the market rises. 

Mr Tammam said: "Where funds are needed now, it is always worth investigating whether they can be sourced from cash savings or other investments. This allows time for your pension pot to grow and recover from the current fluctuations."

The cash may be used to supplement lower withdrawals for income, such as taking out £15,000 rather than £20,000 per year in order to abide by the 4pc rule. 

Is early retirement really possible?

It is still possible to take an early retirement now and live comfortably, as long as you have been thinking ahead. 

Darren Cooke, of Red Circle Financial Planning, said: “If your planning was robust and your investment portfolios are well-constructed, there should be no need to delay retirement.”

While investment pots as a whole are down in 2020, over the past year some investments are actually up. Even some of the most high-risk portfolios may be as little as 5pc lower.

“If a retirement plan was so close to the bone that it could not withstand such small falls in your investments then it was probably going to fall apart at some point anyway,” he said.


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