Stock market falls and pension
I am due to retire next year. I have a defined contribution plan through work. Most of my pension fund is invested in medium-risk equities and I am worried about the impact which the recent coronavirus-related stock market volatility could have on my fund. Is it too late now to take steps to protect my pension fund? Tom, Co Cork
It is not too late to protect your pension fund. You say that you are due to retire next year and, by extension, I take that as a presumption that you intend to draw down the value of your pension plan to fund your retirement.
On retirement, you will have the option of accessing a tax-free amount with the balance then being organised in a manner which is most beneficial to your circumstances.
With such a short period to draw-down, your focus should be to preserve the value of your funds to maximise tax-efficiency at the point of retirement.
Equities have rallied significantly since the market correction at the beginning of the crisis. This should not be the focus of your attention though. As an asset class, equities will always be more volatile than cash or bonds.
For a pension investor right up to five years from retirement, being invested with a majority position in well-diversified global equities would be the recommended strategy. This risk position should be tapered off, though, as you get closer to retirement. Diversifying your investment into a cash position when you are so close to retirement is the recommended route to preserve your funds. Being currently invested in equities should ensure the investment is liquid and there are no barriers to the fund switch.
Once you move to post-retirement age, a new discussion is required. Typically, at retirement you will have the option of investing into an annuity, which has the advantage of paying a set income for the rest of your life, or you can invest in an Approved Retirement Fund (ARF – a post-retirement investment vehicle).
The ARF option has estate planning advantages and gives you more control over the income requirements, taxation and investment decision-making. An ARF requires the draw-down of a taxable income of at least 4pc each year. This may form the main source of your income for anything up to 40 years. To generate this income over time, reverting to a well-diversified global equity portfolio has historically given people the best chance of achieving this requirement.
In summary, move into cash immediately ahead of your imminent retirement. Optimise your pension draw-down and at that point seek clear advice with a financial planner on the most suitable vehicle for your future income.