The coronavirus pandemic has given us a lot to think about in terms of our financial security. If you are planning to retire in the near future, you might have particular concerns.
Market volatility and a range of economic predictions made for some difficult reading in the second quarter of 2020. Despite this, markets have rebounded convincingly since the sharp drop off at the beginning of the crisis. Investors who held their nerve through the uncertainty and stood firm on their investments can breathe a cautious sigh of relief.
History shows us that despite even some of the most significant market shocks, markets do eventually rebound. With this in mind, if you are planning to retire shortly, it is worth considering the following:
Delaying retirement for greater control of your pension pot
If you are able to delay your retirement, this option may give you greater control of your financial outcomes while waiting for further market recovery.
This would allow PAYE workers to continue to tax efficiently contribute to their pension funds, and the self-employed, who can continue to work until they are 75, to bolster their PRSA or personal pension. Those with a Buy Out Bond (BOB) can defer their benefits until a maximum of 70 years of age.
Drawing on cash reserves to tide you over
Withdrawing money from your pension funds now means you are locked into financial losses when the markets are down. If you have cash savings that could be used to live on, these might bridge the gap between starting your retirement and waiting for the markets to rebound.
Draw from one pension pot and not another
If you have more than one pension pot, you may have the option to withdraw from the smaller one, allowing the larger to reap the benefits of the recovering market. This typically applies to people who have worked with more than one employer or might have been self-employed, where you might have a BOB or a PRSA, or multiple of each. Fund holders can withdraw up to 25% cash tax free which depending on the size of your fund, can be of significant value. The remaining funds must be drawn as pension income.
Reduce your expenses
Another option to consider is reducing your costs to reduce the amount you need to withdraw from your pension pot. Think about your current outgoings, from cable TV, Wifi and dining out, to your house and car insurance. These little savings can add up pretty quickly each month. Downsizing your home can also free up much needed cash while saving on future bills.
Understand the amount you can withdraw from your pension pot
In Ireland, holders of approved retirement funds are mandated to draw down 4% per annum between ages 60 and 70, and 5% every year from age 70. As such, it is imperative that you understand whether the amount you plan to take from your pot each year is sustainable.
For basic modelling purposes, most financial advisors will recommend you divide your total pension savings by 25 to provide a rough indication of how much you can withdraw from your account without running out of money over a 30-year period. So, if your pension fund holds €300,000 you can expect to withdraw €12,000 each year (assuming an investment return of 1-2%).
Of course, you should speak to your Hennelly Finance financial advisor to obtain a comprehensive understanding of your own unique financial position.
Drawing the State pension
The maximum State pension is currently €12, 956 per annum, although not everyone will qualify for this amount. Predictions are that in the future, qualifying for the pension will become even more difficult as the government struggles to meet the nation’s financial demands. If you are lucky enough to qualify for the State pension, alongside a partner who also qualifies, this might be enough to delay drawing down on your pension pot until markets are faring better.
Do your homework before switching
If you switch your investments right now, you risk locking in the current market’s losses. However, it is a valid exercise to consider what percentage of shares you need to own because when markets rebound further you might wish to moving some of your investments to lower risk funds such as cash or investment grade government or corporate bonds. It is always important to speak to your financial advisor for qualified advice on your personal situation before making any decisions about switching, particularly when you are close to retirement.
Limit pension withdrawals when you first retire
One of the most exciting prospects of retirement is how to spend your tax-free lump sum. With the maximum lump sum available to pension holders in Ireland currently sitting at €200,000 there are plenty of options for spending your tax-free cash, from a round-the-world cruise to a home renovation or new car. While many have been looking forward to this cash injection, withdrawing less now will give your pension savings the chance to keep growing amidst the economic comeback.
Speak to a Hennelly Finance qualified financial advisor
Now more than ever, during this period of economic uncertainty, qualified financial advice about your investment decision making is essential. Your Hennelly Finance advisor can provide you with detailed advice about your own situation and what options are available to make the most of your hard-earned pension savings while realising your lifestyle goals in retirement. Get in touch with a member of our team to find out more; call us on 091 586500 or email us at [email protected] today.