Protecting your pension in recession
Tuesday, 03 February 2009 11:37
As the stock market falls and interest rates drop, saving for retirement is becoming fraught with danger.
The stock advice is to start saving as early as possible for retirement - but with billions being wiped of the value of stock markets, there is an increased reticence to invest for the future.
Meanwhile those in their 50s with pension pots behind them - but possibly losing value - are facing retirement with uncertainty.
Andy from Life Trust explains: "Pension funds have lost 35 per cent in the last year. People will look at their pension funds and think 'how shall I retire? Crikey I have 35 per cent less'. That is quite a substantial change."
A person who was 65 in 2006 could expect to live until they were 85 if they were male and 88 if they were female.
The total cost of retirement for someone in a typical-sized household living to these ages is estimated to be £412,700 and £471,000 respectively, according to figures from Life Trust.
How can you protect your investment?
Jonquil Lowe, author of Finance Your Retirement, a Which? essential guide, said: "Saving for retirement can be extremely difficult.
"There is no magic bullet or quick solution, you can only limit damage."
She adds: "If you are a long way to go before retirement, then the key is keep saving.
"Those with ten years to retirement have to look to shifting out of equities into bonds."
However, selling equities at the bottom of the market with losses made may not be the best solution.
"It is not a good time to sell equities. So you could move new money into bonds," Ms Lowe explains.
She advises people to look at using new contributions to invest in bonds and so move the mix of a pension portfolio.
Retiring later
One option to open to those facing pension shortfalls is to retire later.
Early retirement plans are now being ditched for late retirement to build up pension pots - especially given recent falls in the stock market.
Research from Life Trust shows 12 per cent of adults currently working now expect to delay retirement by as much as five years.
"A good option is to work a bit longer and defer retirement," Ms Lowe explains.
However, Andy explained delaying recession does have some downsides.
"In recession delaying retirement may not be an option and it does have an effect on society," he says.
"With the late 50s and 60s hanging around there are fewer jobs for graduates and those in their 30s and 40s will see fewer options for promotion as those on the top stay on."
Picking the best annuity
Poor current annuity rates may be another reason for delaying retirement.
When heading to retirement, your pension company should send a 'wake up' pack about your options on how to use your pension pot.
The pension fund can be used to buy an annuity that will pay out an income over retirement.
Figures from the Association of British Insurers show 85 per cent of annuities set up in 2007 were with pension pots of less than £40,000.
This would provide an income of around £220 a month - or less if income is to grow with inflation. See the FSA's comparison tables for more details of rates
However, most people fail to take advantage of the open market option for annuities.
"People need to wake up. It doesn't make sense not to shop around," Ms Lowe explains.
Research by the FSA shows only around 40 per cent of policyholders exercise the option to buy their pension on the open market.
The regulator warned insurers' communications about retirement options were insufficient or unclear, leading some people to make "poor decisions or fail to take active steps to maximise their retirement income".
There is no reason why your pension company should offer the best annuity for your needs.
Simon O'Connor, head of products and marketing at Lincoln Financial Services, says: "Everyone will get a wake up pack drawing their attention to open market. But very very few people bother to do that.
"You can get quite different rates by shopping around for a better annuity.
"When you get your wake up pack - seek professional advice. Then it is a case of going to the market.
Annuity rates can depend on your occupation, health or where you live. Shopping around can make a major impact on the income you receive.
In a morbid calculation, smokers who are on average more likely to die earlier, as well as people from manual jobs such as construction, so annuity rates can be higher - as the investment has to provide an income over a shorter period of time.
The FSA estimates the difference between the lowest and highest non-enhanced annuity rate is 19.2 per cent, while best enhanced annuity rate is 46.6 per cent over the lowest on the market.
Company pensions
Ms Lowe explained people with final salary, or defined benefit (DB), pension schemes should be insulated from these problems.
"With final salary, it doesn't really matter, as your income is promised according to the formula," she explains.
But with firms looking unstable - Ms Lowe advises people to take an interest in their DB pensions and be aware of how funds and your company are performing.
There are suggestions massive deficits for DB schemes could be putting strains on companies.
"If a firm is looking unsteady," Ms Lowe explains, "a simplistic option could be to take early retirement - as full pension is protected."
The Pension Protection Fund - which provides compensation for pensions if a firm with a DB schemes goes under - offers 100 per cent compensation up to. for existing pensioners and 90 per cent of those still paying in.
"If firms are making redundancies it is worth thinking about pushing for an enhanced retirement package," Ms Lowe adds.
Making the most in retirement
Heading into retirement there are a number of ways to use your pension pot over just buying an annuity.
"None is ideal, but it is worth looking at a combination of solutions," Ms Lowe says.
Drawdown options are becoming more popular.
People are able to take cash out of their pension funds to live on - with the hope of a recovery in the stock markets pushing up the funds size.
"Someone lacking income could look at income draw down. You leave the pension investment and take from the fund," Ms Lowe explains.
If you are under 75, you can go into your fund and opt for draw-down, but take nothing, just a lump sum that is tax free.
"You can remain invested and how the market will recover and draw down cash from the pension fund not to scupper plans," Mr O'Connor explains.
But it is not suitable for everyone as the markets could go down further.
"That is enough of a worry to deter people."
They could look at drawdown products with a guarantee - so if the stocks go down further there is a minimum level of income."
These drawdown guarantees or variable annuities are relatively new ideas. The cost of the guarantee can be around one per cent and fund managing fees match those of an existing fund manager.
Andy from Life Trust, however, is more optimistic about the long-term prospects for the stock market.
"Personally I think if you look at the FTSE 100 has been at the 4,000 level more of less for three months.
"I can't believe it won't rise again over the coming years - for that not to happen there would be a major disaster.
"I personally am investing in a tracker - not reliant on one company but backing the UK economy as a whole."
Equity release
Equity release is a further option to consider.
Regulation of the equity release industry has made it more acceptable to use property to boost retirement income. However, house price drops have also hit people's thirst for relying on property.
Last year £1.18 billion of equity was released by retirees in 2008 - a drop 14 per cent on 2007. The total number equity release plans was down 14 per cent to 25,790.
David Cooper, marketing and distribution director at Just Retirement, says: "The picture may look bleak for those whose retirement is not currently meeting their expectations but there are options for a good many people and it is important that they get the right advice to help them make the best of what they have.
"The availability of substantial equity in the home could dramatically improve standards of living in many cases, either by providing income explicitly or by freeing up income currently being used in other ways.
"This is not a new phenomenon: the treatment of property as an asset for use in retirement planning is gaining in acceptance, for specific uses, to supplement income, to combat the effects of inflation and provide for other needs.
"We simply believe that the current economic environment will accelerate this trend."
Dean Mirfin, group director of Key Retirement Solutions, said: "Whilst 2008 for the mainstream mortgage market saw a considerable and ongoing decline in the levels of new mortgage business, by comparison the equity release market has had a more resilient year.
"The past year proved tough for all financial service sectors, however the results for the equity release market show that demand is still strong despite a year of house price deflation and understandably issues of confidence amongst consumers."
Benefit from benefits
Benefits for those receiving their pension - through tax credits and council tax credits - is complex to say the least.
Some are taxed and some are not, and some are means tested and some are not.
Age Concern estimates £4.6 billion in benefits go unclaimed by older people every year.
It is important to see what you are eligible for.
"Once in retirement you have to make sure you are getting all the benefits," Ms Lowe says.
"Some are overlooked - such as attendance allowance - which is not means tested and is tax free."
Those being means-tested for benefits should also be aware the government assumes you are earning ten per cent on savings and investments - something many may say is cloud cuckoo land in the current environment - so actual income may not stand up to what the state thinks you are getting.
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