What to do with your pension if you retire later than planned

It is possible to earn interest on your savings and do some good along the way.

The economic impact of the Covid-19 crisis raises the possibility that many workers may end up retiring later than planned.

Being unexpectedly out of work, or on lower wages in the years leading up to retirement, can also have negative implications for your nest egg. But there are many ways to deal with this, and the situation may not be as bad as you first thought.

Many people saw the value of their retirement savings reduce when stock markets – and the pension funds that invest in them – fell in March 2020 when the world entered lockdown. The extent of the Covid-19 crisis has even caused some people to decide to delay their retirement plans. 

One in five UK workers aged 60-65 say it is likely they will have stop working later than they first planned, according to interactive investor’s Great British Retirement Survey 2020. 

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One in four of those delaying retirement say they will have to wait a further year until they can stop working, while one in three expect to wait an additional two years. Almost 25% say they will postpone retirement for three years, while 14% expect to work another five years. 

Most worryingly, one in four of those delaying retirement say that they are worried their investment losses will mean they will never be able to stop working.

Most global stock markets recovered the losses made over the summer, before suffering some of their biggest losses in many months in a sell-off during October attributed to caution over Covid-19 and the US presidential election. 

A strong rally followed the US election results and news of a possible Covid-19 vaccine developed by American drug giant Pfizer, but financial markets are expected to remain volatile in the months ahead.

Review your investment strategy

Most workplace pension funds will have some form of de-risking period as people get closer to retirement. This usually kicks in around seven to eight years beforehand.

interactive investor’s head of pensions and savings, Rebecca O’Connor, says it is good practice for savers to move away from risky assets such as stocks into safer assets as they approach retirement. 

She said: “This helps prevent you from being caught out by market volatility when it is too late to recover.”

If your pot has already started to de-risk, the impact of the Covid-19 market falls would likely be less harsh than for someone much further away from retirement. 

This is because younger savers invest more in stocks and growth assets as they have more time to cope with the ups and downs of volatile stock markets.

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“If your retirement date is now years further down the line, it is a good idea to review your pension fund’s investment strategy to see if it is still suitable,” says O’Connor.

It is important to get the timing as right as possible for your circumstances. 

If your pension provider expected you to retire at age 65, but you now plan to work until 68, it will move you into more low-risk assets too early. 

That could mean missing out on years of returns from assets that carry more risks but generate higher returns.

You should notify your pension providers about your retirement date changing. They should then update your investment strategy accordingly. 

Ask your provider what you are due to get at retirement based on the current value of your pension fund. 

Changing your stated retirement age from 65 to 68 would reset your investments back to a different point in the de-risking process, says William Chan, head of direct contribution investment at pensions consultancy Hymans Robertson.

De-risking may involve, for example, having a large amount of your pot put into cash, depending on the default investing strategy that has been selected. 

O’Connor says: “Given where interest rates are at present, i.e. close to zero, it wouldn’t help growth prospects to be in cash – which is where a lot of money ends up when pension pot risk is reduced, for longer than necessary.”

Savers should also look carefully at what their returns are after fees. 

“They have to look carefully at where they are positioned and how they're invested, especially if they are in the default fund of a workplace pension scheme,” says Chan. 

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It is different when savers have a self-invested personal pension, or SIPP, which does not have a default investment strategy and allows more flexibility around where to invest.

“This can be a blessing if, for instance, you want to work for longer and therefore don’t wish to de-risk quite as soon as you would in a workplace scheme, where this is done automatically,” says O’Connor.

Pay more into your pension

If you have to delay retirement you could also increase contributions to your pension fund. Employers must pay a minimum of 3% of your salary into your pension, while you put in 8%. Some employers may offer a matching arrangement to pay higher contributions if you put in the same amount. 

interactive investor’s data suggests that people between 55 and 65 generally contribute less on average each year to their retirement pot than they did between the ages of 50 to 55. 

Since the pandemic started, contributions among 55- to 65-year-olds have fallen slightly, while contributions among 50- to 55-year-olds have risen slightly.

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Brian Henderson, partner and director of consulting at pensions advisory Mercer, cautions against savers delaying retirement solely because they are concerned about their nest egg. 

He explains that when you first start saving into a pension in your younger years, pension contributions are bigger than the investment returns. 

“Your investment returns start to outweigh contributions from around the age of 40 and by the time you retire, most of the growth in your pot is from returns,” Henderson says. 

“This means that working a little longer and putting more money into your pension, in theory would likely have quite a small impact. That horse has largely bolted."

A lot of people may have already taken their 25% tax-free lump sum from age 55. If you have not taken it yet but were planning to soon, it may be worth not taking the lump sum if you do not need it. 

“In that situation, and you have decided to keep working, you may as well keep it invested in the pension to have a bigger pot when you retire,” Henderson says.

So do not lose heart if you think you may need to delay your retirement – you are not alone, and these steps can help reduce any impact on your overall pension pot.