Will you be forced to delay your retirement

Advice is invaluable, particularly when you are dealing with more complex financial products

An increasing number of people may be forced to delay their retirement plans because of the impoverished state of their pensions caused by the ongoing financial crisis. Pension funds have been affected by the stock market falls, and those who confidently assumed that their property would subsidise their retirement have seen their house prices fall. Add to this the fact that annuity rates have also fallen, due largely to increased longevity and declining gilt yields.

As a result, many of those who are fast approaching retirement are suddenly aware that their pension fund isn’t sufficient to provide the standard of living required during their retirement. This leaves them in the invidious position of either delaying retirement and working longer or accepting a far lower standard of living in retirement. So if you are approaching retirement and find yourself in this position, there are steps that you can take to improve your pension situation.

Firstly, it is essential that you receive professional advice so that you can assess your options. You also need to make sure that you protect your existing pension funds from any further sudden market falls.

Should you make a conscious decision to move your funds into safer cash and fixed-interest investments now, effectively selling out at a low point of the market? Alternatively, should you keep your investments exposed to the stock market and hope there will be a recovery between now and your retirement date?

Your decision will depend on your attitude to risk for return, whether you have any other pensions or investments to fall back on and how long it is until you retire. But delaying your retirement for a year or two to give the stock market time to recover is a highly risky strategy.

Retirement for many today is rarely an all-or-nothing decision, where one day you are collecting a salary and the next your pension plan is converted into a fixed income for life. While your pension fund may not be big enough to buy you sufficient income today to provide the standard of living you want, you may still be able to achieve this in future if you look at ‘phased’ options. This may mean working part-time, doing consultancy work or taking a retirement product that enables all or part of your pension fund to remain invested, potentially giving you a higher income in future.

It’s not only your pension you need to consider. Do you have other savings and investments that can be used to supplement your income? Don’t ignore your property. House prices may have been falling, but many retirees are still sitting on substantial amounts of equity in their property, which can be accessed via an equity-release scheme.

There are also a number of new annuity products that are designed to provide a ‘halfway house’ between the security of a conventional annuity and the investment freedom of an income-drawdown plan. New annuity products, so-called third way annuities, aim to provide the best of both worlds. Alternatively, there are now fixed-term annuities, which give pensioners the option of re-annuitising after five years.

In the current recessionary climate, many are concerned about deflation. But if the economy does pick up again, either this year or next, then inflation could once again become a big problem, particularly given the government’s recent strategy of quantitative easing, or ‘printing money’.

Inflation can be particularly damaging to those on a fixed income, as it means that, in real terms, the buying power of your pension decreases. There are a number of ways to ‘inflation-proof’ your pension, although all come at a cost, usually of receiving a lower starting pension. But if inflation does take off, then these could prove to be a good option.

Those buying a standard annuity can simply opt for it to increase at a set amount, so it should keep track with price inflation. Alternatively, an annuity (or income drawdown plan) that leaves your pension fund invested may achieve a similar result if the stock market recovers.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.