The COVID-19 outbreak has signalled the dawn of a worrying time for everyone. As well as anxiety about our own health and the wellbeing of our loved ones, many of us are understandably worried about the financial future. Recent stock market turbulence is concerning for all investors, but particularly for those who are in defined contribution pension schemes and looking to retire in the near future.
The important thing is not to panic. Although we are in very uncertain times, reckless actions could severely endanger our financial wellbeing in the future. Here are some things you should consider if you’re planning to retire in the next few years:
Don’t cash out suddenly
Cashing out in a panic could severely damage your financial security in retirement. Although no one knows when the markets will recover, selling now could mean that you are taking your pension at the bottom of the market. It’s likely that financial markets will regain their strength over a period of time, even if we don’t know how long this could take.
What’s more, cashing out will mean that you’re likely to end up paying lots of unnecessary tax. In most cases, only the first 25% of a defined contribution is tax free; the rest is taxed as income. Chances are you’ll end up with a gigantic tax bill.
Remember that pensions aren’t the only form of retirement income
Retirees frequently use other assets such as cash ISAs, cash savings and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement in order to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.
If you don’t have any other assets to fund your retirement, you could consider delaying your retirement or working part time for a period. Hopefully, this would allow the markets time to recover, giving you more confidence when you finally do leave the workforce.
Watch out for scams
Unfortunately, some unscrupulous people see times where people feel financially vulnerable as an opportunity to exploit them. There has been a lot of fraud since the start of lockdown and it has been reported that people are being scammed through being sold non-existent pension plans.
Whatever you’re planning to do with your pension savings, it’s vital to check that the company you’re planning to use is registered with the FCA. Keep on your toes and if you see anything that looks too good to be true, it probably is.