Has Covid wrecked your retirement plans? | #retirement | #elderly | #seniors
At the start of 2020, Rosemary Hirsch felt confident that it would be her year. Months after being made redundant she was just about to start work again.
A local authority project manager living in south London, she had lost her job early in 2019 and interviews had repeatedly failed to materialise into employment offers.
Eventually she landed two part-time contracts through an agency and was looking forward to returning to work. “But the minute Covid struck, they just fell apart,” says 53-year-old Hirsch.
“I felt very disheartened, and then the children were at home and we were home-schooling. The jobs market in my industry disappeared anyway, so I didn’t work until last November, when I got a Test and Trace job.”
Financially, life has become tough. Hirsch, now 55, has occasional work and is already taking a small pension from the local authority. She has also accrued several other small occupational pensions from previous jobs, worth a total of about £12,000 a year, and is in the process of starting to take an income from them.
“I really didn’t want to take them so early, but I felt I had to. I’m just going to try and get through until October, when my girls will all be in secondary school and I can look for another project management job,” she says. “I would much rather have left the pensions until later in life, but I’ve been out of work for two years now, with only small sums coming in.”
Hirsch is by no means alone. Workers aged over 50 suffered the highest rate of redundancy of any age group in the three months to February, according to the latest data from the Office for National Statistics. The ONS said that, while young people had borne the brunt of the first wave of job losses, and had been hardest hit overall, older people were later more likely to be made redundant.
The pandemic’s immediate impact on incomes has prompted widespread concern and rapid government action in the form of the multibillion pound furlough scheme and other support. The longer-term effects on savings and retirement plans have attracted less attention.
However, millions of over-50s have seen their retirement prospects shaken in the crisis, and in some cases seriously blighted. Nearly one-third of people over the age of 54 in a survey this week by the Institute for Fiscal Studies said their retirement income would be lower as a result of the pandemic.
Sharp differences in financial security have emerged between households: those working from home on steady incomes or drawing reliable pensions have seen savings rise as a result of restrictions on holidays and going out.
The less fortunate have seen jobs cut, savings dwindle and — for older people — retirement plans thrown into doubt and confusion. FT Money explores the particular challenges facing those in their 50s and early 60s, who have little time to recoup savings spent in the pandemic and may struggle to refinance pension pots.
For some older people there have also been opportunities — for example, to start a new job, launch a business or decide they have enough money to accept early retirement. But generally bad news has had the upper hand. Two out of five working over-50s said their career and retirement plans had been affected by the pandemic, according to a March survey by Legal & General. Only 20 per cent of that group said their retirement prospects had benefited.
Hirsch is optimistic that she will get back to work and her earnings will recover in the coming months. But in accessing her pensions early to tide her over this barren period, the danger is that she will fall foul of financial rules on retirement savings.
She could start taking a taxable income from her defined contribution pension, an invested “pot of money” that is the standard UK retirement savings vehicle. But then her annual allowance — the maximum a taxpayer can put into a pension each year tax free — will be cut from £40,000 to the so-called “money purchase annual allowance” (MPAA) of £4,000. This would limit her chances of building a more secure retirement income over the next few years.
Mike Clarke, director at chartered financial planners True Bearing, says people in Hirsch’s position should use other capital before dipping into their pension, if they have any. Otherwise, he says, they could move their personal pensions to a flexible access drawdown plan which allows them to take some of their tax-free cash allowance (25 per cent of the pot) as regular income.
“If they just take the tax-free cash element they will not trigger the MPAA. If they take any ‘taxable’ income it will be triggered, restricting future annual pension contributions to only £4,000 a year.” Clarke adds that once people are back in work, they should immediately stop taking cash from the pension and ideally start contributing again.
The best-laid plans
The pandemic has also affected the process of retirement for many people. L&G’s research found that as a result of Covid-19, 30 per cent of those aged 50-plus and not already retired have either delayed their expected retirement date (by an average of three years) or given up altogether trying to second guess when they might be able to stop working.
For people with investment-based occupational or personal pensions, the start of the pandemic was a financial shock that left many contemplating additional years in work.
One was Bridget Coaker, a 62-year-old pilates teacher living in London. As March 2020’s stock market implosion gathered pace and lockdown became a reality, she found herself rethinking both work arrangements and retirement prospects.
“Last March I went from teaching in person to teaching online within 48 hours, and I had no idea what would happen,” Coaker recalls. “I had never heard of Zoom, but this was true for a lot of pilates teachers, and BCP, the organisation I am with, gave us a lot of support. I was lucky in that 90 per cent of the clients came online with me, and it has worked out very well.”
But her two occupational pension funds had lost 25 per cent of their value. She decided to put back the retirement age on the pensions from 66 to 70 to give herself a better chance of building the kind of sum she wanted to retire on — and despite the emphatic market bounceback she has not brought it forward again.
“They are ‘lifestyle’ pension funds; putting the retirement date back means the pots won’t be moved so early into lower-risk funds,” Coaker explains. She expects to leave them invested and move them into drawdown when she needs to take an income, as she doesn’t want to move out of the stock market.
“I’ve sort of stopped thinking about the pensions as pensions in the traditional way, and more as savings accounts which I will access as and when I need to,” she adds.
Better still, the success of her pilates classes online has enabled Coaker to carry on saving in a new pension fund with Vanguard, the investment group. “I have thought about pension consolidation, but it would be complicated at the moment. Anyway I quite like spreading my eggs between different baskets, and I don’t believe it is costing me anything. I love a spreadsheet, so I keep an eye on the performance of each.”
However, Nick Onslow, a chartered financial planner with RU Group, suggests she may have less diversification than she thinks. “Many investors believe they’re diversifying their pensions by having them with different providers; but this is normally not the case, as providers tend to invest in funds holding the same leading dividend-paying shares, such as Apple and Shell,” he explains.
Job losses and lump sums
Coaker was lucky in that she was already self-employed and her business was well-established when she had to take it online. But many others lost their jobs as a result of the pandemic.
Some businesses cut staff wholesale or folded altogether while others seized the opportunity to restructure, often shedding older, more expensive staff. Among those hit was Ian Moffatt, an operations manager for a small company in South Yorkshire supplying the rail industry, who was unexpectedly made redundant at the age of 62.
He was furloughed early on in lockdown, only to be subsequently informed that his role was “no longer viable because of Covid” and put through the redundancy procedure.
“I offered to go part-time, job-share or work from home until business picked up, but whatever I suggested was dismissed,” Moffatt recalls. By July he had been made redundant, and by October he was out of work with an agreed lump-sum settlement and a contractual ban on working in the industry for six months.
That period is now past and Moffatt is looking to work as an independent consultant in the sector. “I’m 62 and unable to find employment, but having saved hard for many years I’m determined not to tap into my retirement funds until I reach state pension age at 66, particularly as lack of income means I’m not able to build them up at the moment as I should be doing,” he says. “Because I’ve got savings I can’t claim any state benefits, so I have no option but to work to bridge that gap.”
Frank Tunstall, a financial planner at True Bearing, says Moffatt might be able to use the redundancy money to bolster the tax efficiency of his pension. “Depending on the size of his redundancy, he could potentially contribute part of it [over the initial tax-free £30,000] into his pension, thus enhancing his pension savings while also minimising income tax.” Tunstall adds that this contribution should ideally be made in the same tax year as a redundancy payment to maximise tax relief.
Moffatt can see a potential longer-term upside to all the trauma of the past year. “I like the idea of working from home and doing things in my own time at this stage in my career, so there could eventually be a good outcome, provided the work comes in,” he says.
Seize the chance
One point highlighted by the L&G research is the way that the pandemic has polarised the “retirement opportunity gap” for the over-50s. Those who have had job security through the past 15 months have been able to add to their savings, putting away an average £335 a month extra and making an earlier retirement — or a more “phased” easing out of work — an increasingly viable option.
Similarly, some of those who already have secure, good-sized pensions have seized on lockdown as the catalyst they needed to stop working altogether. L&G found that 10 per cent of over-50s who have not yet retired are expecting to retire earlier than they anticipated, by two years on average.
Early retirement was the path chosen by Glasgow-based Douglas and Sarah Thomas (not their real names), both in their mid-50s, who were working as a distribution company manager and district nurse respectively. They originally planned to stop working by 60, but the pandemic crystallised several reasons to bring it forward.
As Douglas Thomas explains: “We were both in good health and wanted to retire while we were still relatively young, fit and active enough to enjoy our retirement, and our new granddaughter. There was no doubt that the pandemic had an influence on our decision to retire early.”
Working from home made Thomas realise he had had enough of commuting from Glasgow to Edinburgh, and he knew too that a corporate restructuring was on the cards and younger staff might lose their jobs. “I felt it would be better for me to retire now to help avoid that, given that I was planning to go in the near future anyway,” he says.
Nonetheless, it was a big decision to take and the Thomases needed to be sure their financial situation was secure, so they talked to a retirement specialist at Standard Life Aberdeen, the investment group.
“They helped us confirm that we could indeed retire early, hopefully with our income lasting all the way until age 90 — potentially even with some funds to spare. We were also able to stress test our plans to see what would happen in certain circumstances, for example, a market crash or bereavement. We even discovered a benefit with one of my pensions that entitled me to additional tax-free cash, which we made sure to maximise in our plan.”
The pandemic has brought unexpected financial benefits to people on the cusp of retirement with sufficient resources to decide their own futures, while burdening many others with uncertainty, fear and financial hardship. Either way, it is worth making sure a life-changing decision does not turn into one you come to regret.
If you’re about to make important decisions about your work and retirement savings, you should consider taking professional advice. But a good starting point is the free information and guidance available from a number of online tools and resources.
If you are among the millions feeling extra financial pressure, consult the Money Advice Service.
Phone Pension Wise for free to talk about what you can do if you’re worried about the pandemic derailing your retirement plans
Contact the Pensions Advisory Service if you’re concerned about the state of your pension.