Avoiding pension ruin from market crashes

Picture the scene: you are just one year away from retirement and, thanks to diligently saving and tax relief, you have £350,000 in your pension pot. A bit of Googling suggests you can expect an income of around £20,000 a year, which you are comfortable with.

Then the big crash happens.

40% of worldwide stock value is wiped out overnight and your pot shrinks to just over £200,000. The markets look set to recover over time, but not quickly enough for you – you end up retiring with £220,000 in your pot. This provides a reduced income of £13,000 a year and a rather different retirement outlook. How do you feel?

It doesn’t matter how prudent and cautious you have been in building your savings, one sharp drop in the market at the wrong time could have disastrous effects on your retirement. Decades’ worth of hard saving and growth could be slashed, and the closer you are to withdrawing money from your fund the more damaging a single bad year in the markets could be.

This is what a number of new protected pensions are designed to prevent.

Insuring your retirement income

Some providers, such as MetLife and Aegon, are now offering a welcome safety net for savers: it’s now possible to protect your pension from market crashes.

With a typical fund, your money is invested at a risk level you are comfortable with and, all being well, it grows over time. If the funds you are invested in take a last-minute downturn, though, it could have a devastating effect on your later life income. Think it can’t happen? Imagine the impact on your life if you had been on the verge of retiring just before the recession hit in 2008.

You can now protect your pension so this doesn’t happen to you, regardless of how the market performs. With products such as these, your pension will grow if the investments grow, just like a typical fund. Unlike a typical fund, though, guarantees are in place to protect your future income even if the funds are impacted by a market downturn.

How does it work?

For most people the purpose of a pension is to provide as much income as possible. Funds are often invested in the stock market, which can go up and down. By insuring your retirement income you are protected from any negative fluctuations in the market. With MetLife’s product, for example, the value on which your income is based is guaranteed to grow by at least 5% a year, so if growth in your investments falls below that level, your returned income is not affected.*

Like mortgage protection and home insurance, securing your later life income offers peace of mind – in this case, for the rest of your life.

What if the investments grow consistently?

If your investment funds grew consistently above the guaranteed rate then your fund would still increase at the same time. The pension’s overall value may be fractionally less than if it was invested in some uninsured funds, as there is a higher cost for the security. The reality, though, is that this is a price many are prepared to pay for absolute security of income.

Is it suitable for everyone?

Protected pensions are most useful for people approaching retirement – perhaps five or six years away from taking an income – as the younger you are the more manageable any drops in investments should be. Some providers also have limits on how young you can be to use the product; for example, MetLife has a minimum age of 50 for its guaranteed income product.

Don’t leave your retirement income to chance; talk to us to find out if protected pensions are suitable for you.

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The value your income is based on could be reduced if you were to take a tax-free cash lump sum from your plan, non-guaranteed income withdrawals or if you switch or transfer part of your fund.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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