22 May Q&A: Planning ahead for retirement: What should you do now?
Even if planning ahead for retirement is many years away, a sudden fall in the stock market can be a cause for concern.
You may worry whether markets will recover over the coming decade, or an even longer timeframe, and wonder what you should do next.
Here, Brewin Dolphin‘s Financial Advisor Paul Povey answers some of your questions.
My pension has sunk in value. What should I do now?
Pensions are a long-term investment, and if you have many years to go until retirement, it is likely that markets will recover and you will have time to make up any shortfalls. In this case, you should hold your nerve and avoid cashing in your investments, as this will only crystallise losses on investments that have fallen heavily. If affordable, you should continue making contributions to benefit from long term returns.
An adviser can help you understand your options, ensuring you make the right investment choices at the right time.
Is now a good time to boost my pension?
A volatile market could present an opportunity for investors who are some way off retirement. It could actually be a good time to boost your pension by increasing your contributions if this is affordable.
You can benefit from so-called pound cost averaging, buying more shares when the price is lower and fewer shares when the price is higher. This has the potential to boost and smooth returns over the long term, as you will have acquired more shares at a lower average purchase price.
How can I protect my pension?
Your pension will hopefully already be invested in a mix of assets, including stocks, shares, funds, industrial sectors and geographical regions, to smooth long-term performance and minimise risk.
However, you could expand the range of funds in your portfolio by including those in less volatile assets if you wish. For example, absolute return funds aim to give investors a positive return over cash and act as an alternative investment, diversifying investment exposure when bonds are offering very low yields. There are plenty of funds that also operate similarly to absolute return funds, helping to further diversify a portfolio.
You could also hold a portion of your pension in cash in the years leading up to retirement, providing a source of income if markets fall when you need to access your fund. This will prevent you from having to sell at a loss to draw income, if needed, and give you the flexibility to pick up investments at a lower cost when the time is right.
Should I be investing towards my retirement considering the current market volatility?
Remember that stock market falls are part of investing, and history shows that markets typically do rise again in time, whatever crises are endured. If you have a long timeframe, of 10 years or more, your investments have the chance to recover in value. However, the closer you are to retirement the less risk you should be taking, so that any stock market shocks don’t impact you too much.
Also, pensions and other tax-efficient investments have particular advantages. When you save into a pension, your contributions are boosted by tax relief at your marginal tax rate. A £10,000 contribution will cost a basic-rate taxpayer £8,000, a higher-rate taxpayer £6,000 and an additional-rate taxpayer £5,500. However, not all additional-rate taxpayers will receive this level of tax relief. Those with adjusted income above £240,000 could see their annual pension allowance reduced to £4,000 per year, resulting in maximum tax relief of £1,800. Yet tax relief, along with growing free from capital gains tax and income tax, could significantly improve your income in retirement.
But you can save for retirement in various ways – for example, ISAs are a good option, with all growth and income free from tax. You don’t get the generous tax relief on contributions, but all withdrawals are tax-free.
As you move towards retirement, a financial planner can help by developing and managing a tailor-made retirement plan, whatever your stage of life. This can stress test how different economic events may impact on your goals. So you have the peace of mind that you have planned for your long term financial well-being.
Disclaimer: The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance and performance. Opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd. This information is for illustrative purposes only and is not intended as investment advice. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.