Recession causes retirement plans rethink

7 January 2023

The challenging economic environment has prompted half of retirement investors to rethink their retirement plans and strategies, new data from AJ Bell has revealed.

According to the investment platform, almost a fifth (19%) have switched investment strategy during the difficult period, while 11% plan to draw less income in retirement.

Tom Selby, head of retirement policy at AJ Bell, said: “It is important anyone considering doing this has a firm focus on their long-term retirement goals, rather than attempting to time markets, taking risks they aren’t comfortable with or panicking because their portfolio has taken a short-term hit.

“For anyone investing over a time horizon spanning decades, the current bout of inflation, while painful, shouldn’t necessarily force a change in approach. Indeed, the danger in shifting your investments based on relatively short-term factors is you drift away from your long-term strategy and end up paying unnecessary trading costs to boot.”

The cost of living crisis has also spurred retirement investors to reconsider plans to stop working, with 10% expecting to work part-time in retirement and the same amount planning to retire later than planned. A smaller proportion (3%) say they will return to work having previously retired. Despite annuity rates improving significantly over the past year, just 3% of people say this has incentivized them to buy an annuity in retirement.

Selby said the changes in approach will help ensure withdrawal plans are more likely to be sustainable over the long-term and said it was encouraging that so many people are “clear-eyed in their approach to generating an income” in their later years, but warned that the longer the cost-of-living crisis lasts, the greater the issue of sustainability as more people turn to their retirement pots to maintain their standard of living.

Selby said: “For those who have stopped working, that might mean increasing withdrawals in line with inflation. Given inflation is currently running at double digits, this creates a real risk to the sustainability of withdrawals, particularly where large withdrawals are coupled with falling markets.

“Among those aged 55 or over who are still working, we will inevitably see more people turning to their retirement pot earlier than planned, either to cover their own increased living costs or help a loved one facing financial difficulty.”

The most recent data from HM Revenue & Customs suggests this trend was already underway in 2022, with £3.6 billion of flexible pension withdrawals made between 1 April and 30 June 2022 – a 23% increase year-on-year.

Looking ahead, Selby said 2023 will likely see rising costs, particularly mortgages, “start to bite” and said it could have consequences for people’s longer-term retirement plans.

As well as depleting their pension pots sooner than anticipated, retirement investors also run the risk of triggering the money purchase annual allowance, which reduces the annual allowance from £40,000 to £4,000 and removes the ability to carry forward any unused allowance from the previous three years.

Selby added: “One way to avoid triggering the MPAA is to just take your tax-free cash, but some will need more than their tax-free cash while others will be unaware that taking taxable income will reduce their available annual allowance.

“Given the immediate financial challenges facing millions of people, the government should review the level of the MPAA as a matter of urgency.”

Professional Paraplanner