This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
In May 2020, many people are concerned about what to do with their pensions. Here at Elmfield in Lancashire, our financial advisers have had multiple recent enquiries about whether now is a good time to take a 25% tax-free lump sum from a pension, or if a decision such as this should be delayed until the stock market recovers.
In addition, some who are of working age have asked if it is wise to lower their monthly pension contributions to help ease pressure on their immediate finances, especially if their household income has gone down due to instability caused by COVID-19 and the lockdown.
At Elmfield, our advisers would generally caution against reducing pension contributions at this time unless it is absolutely necessary. Below, we outline our reasons for continuing to contribute into a pension during a down and volatile market, and that May 2020 could even be a great time to start saving towards your long-term future if you have not yet begun building your pension pot.
We hope this content aids your thinking. If you’d like to speak to an independent financial adviser about your pension plan you can reach us via:
T: 01282 772938
Why the future still matters
With many families facing strain on their short-term income, it’s easy to see why many people might look to areas of their finances where they might be able to “cut back”. Monthly pension contributions can easily amount to hundreds of pounds and concern something “far off in the future”, which makes them a natural target for some people. Whilst your immediate financial security is incredibly important, it’s also important to not lose sight of the future.
Consider the state pension for a moment. In 2020-21, the full new state pension will give you £175.20 per week (i.e. £9,110.40 per year) if you meet the criteria. Whilst this would be a welcome sum to help you meet your retirement costs, it is unlikely to cover your costs entirely. You will almost certainly need additional sayings and/or income streams to support you. This is why the UK government introduced the auto-enrolment scheme in October 2012, to enable more people to build greater sayings towards their future via their workplace pension scheme.
For our financial advisers in Lancashire, this should lead people to think very hard before suspending or lowering their pension contributions – even if temporarily. Speak with your financial adviser if you are at all concerned about your financial plan, or pension contributions.
Should I put more into my pension?
There is another line of thinking in the wake of the COVID-19 outbreak and subsequent market volatility. For more “aggressive” or “risk-accepting” investors, a market trough could be the ideal time to increase their pension contributions. Their reasoning? Doing so could enable them to buy equities at a lower price compared to January 2020, or 2019. In the long term, when these stocks hopefully recover as the market rises, they might hope to make a bigger return than if they had simply kept their monthly pension contributions unchanged in Q1 of 2020.
Here, it’s important to discuss your financial goals with your financial adviser, along with your attitude to investment risk and the pension strategy you feel is most suitable to you. For some people, a “down market” in 2020 could be a good time to start investing for your retirement, especially if you have a longer time window in front of you to make up for short-term losses.
Be careful, however, about committing large lump sums into your pension. This carries certain risks even during an upward market, let along during the kind of volatility we have witnessed so far in 2020. In short, you do not know if the market will suddenly plummet shortly after you commit a large lump sum. Committing smaller, regular sums (i.e. “pound cost averaging”) can help to shield your portfolio if there is a sudden lurch in the equities market.
What to do if you’re worried about your pension
If you’re at all concerned about the value of your pension, the best thing to do is voice these with an experienced independent financial adviser. They will have the skills, qualifications and knowledge you need to act as a professional sounding board, offering practical solutions which can give you greater confidence about the right way forward. Here at Elmfield, our financial advisers in Padiham, Burnley and across Lancashire are here to assist if you wish to start that conversation with us.
For those with many years ahead of them until retirement, there could still be time for your pension investments to recover from stock market fluctuations. For those approaching their retirement or over-55s who are thinking about taking some of their 25% lump sum from their pension pot, be careful to consider the tax implications as well as the impact this might have upon the long-term size of your retirement savings.
Conclusion & invitation
If you are interested in starting a conversation about your financial plan, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938