Millions of retirements derailed by coronavirus – here's how to get back on track

The coronavirus pandemic has thrown millions of people’s retirement plans off course, dashing dreams of an early end to working lives.

Nearly £20,000 was wiped off the value of the average “defined contribution” pension pot for savers in their 50s when the stock market plummeted in March, according to figures compiled for Telegraph Money by Quilter, the wealth manger.

Those nearing retirement were spared the worst, thanks to typically greater exposure to lower-risk bonds and cash. Stock market investments fell by 37pc, although they have bounced back to some degree since.

Pension savers have been urged not to withdraw large amounts of cash from their pots as they risk locking in these losses for good.

Legal & General, the pension firm, estimated that more than 1.5 million workers aged over 50 would defer their retirement and work an extra three years on average.

It found that workers who had been furloughed or taken a pay cut during the pandemic were most likely to delay retirement.

Lee Clark of Brewin Dolphin, another wealth manager, said the outlook felt bleak in mid-March when there was “maximum panic” but a lot of the losses had already been recovered.

Even so, savers should halt withdrawals from their pension while the lockdown continues, he said.

Pension investments have bounced back rapidly, with the average £100,000 pot down by £7,200 since the start of the year. At the market’s trough in March the pot would have been worth just £80,276.

Brian Henderson of Mercer, a consultancy, said those who were due to retire this year should be well protected and could be assured their investments were safe.

When nearing retirement, many savers’ investments are put on a “glide path” that automatically moves the pension to more secure investments.

Although the typical retirement age is 60, most investment strategies assume the saver will stop work at 65 or older. This means even those aged 55 will have been exposed to higher risk. Even so, portfolios should have been reasonably well protected, Mr Henderson said.

Those who planned to take out an annuity would typically have been the most shielded, as they would own ultra-safe assets, he added. DIY investors who run their own portfolios may not have been so lucky.

Workers typically increase the amount they put into their pension in the decade leading up to retirement in a bid to boost the pot while they can.

But one of the “harsh realities” of the crisis is that those who want to retire in the near future have been hit both by falling pension values and by potentially less opportunity to save now, thanks to job losses or reduced earnings, said Svenja Keller of Killik & Co, a wealth planner.

She said: “It’s an incredibly worrying time. Knee-jerk reactions may take over, such as the temptation to cash in a pension before its time or drawing more than the 25pc tax-free cash.”

Savers can access their pension from the age of 55 using the “pension freedom” rules. Those who have taken a pay cut or face redundancy may choose to dip into their pension as a source of income.

However, there are tax implications from taking money from your pension.

Drawing out even one penny above the tax-free amount triggers a reduced contribution limit under the “money purchase annual allowance” laws.

If you do this, the maximum annual contribution that can be made with tax breaks falls from £40,000 to £4,000, a 90pc drop.

This could set savers back years in their plans to build up a large pot on which to retire comfortably.

For example, someone with a £100,000 pot who planned to double it by retirement could hit their target within seven years if they saved £10,000 a year with tax relief and 4pc growth, according to AJ Bell, a fund shop.

But with a 20pc hit to investments during the pandemic and a £10,000 one-off withdrawal, which triggers the reduction in the contribution limit, they would more than double the time it took to reach the target.

Tom Selby of AJ Bell said: “Continuing to punish people with a 90pc reduction in their allowance during the pandemic feels particularly cruel.”

AJ Bell and Quilter have called for the reduction in the contribution limit to be suspended, at least for those who have been forced to access taxable income from their pension during the crisis.

The Treasury declined to comment.

Reader Service: Sign up to the Telegraph Media Group Pensions Advice Service today for expert and impartial pension advice