Hundreds of thousands of workers will retire at the “worst time in two decades” this year – and are on course to run out of money four years sooner than they would have if they accessed their pensions in 2021.
Plunging stock markets and runaway inflation mean that the 700,000 people reaching state pension age in 2022 will risk their savings not lasting long enough to cover their retirements.
Pension pots will run dry four years sooner for those retiring this year than those who did in 2021, as their savings have shrunk 12pc, calculations for Telegraph Money by consultancy LCP have found. A dramatic jump in the cost of living has meant that pensioners will need to draw extra income from their pensions to maintain their lifestyles.
Bonds, which make up a large portion of investments for those in their 60s and older, have had their lowest half-year returns in the past 20 years, according to Dan Mikulskis of LCP, falling in value by between 10pc and 15pc. “Falling portfolio values and inflation pushing spending up is the worst combination for those retiring and can deplete a portfolio more quickly,” he said.
Liz Bannister*, 62, from London, said her well-laid plans to retire in August had been derailed after her pension dropped £27,000.
She was “shocked” to watch her pension fall 12pc since January. “I was beside myself with anxiety when I saw it suddenly go down,” she said.
“At the end of last year I was in a good place and knew that I could afford to retire, but that has changed so quickly. Now I’ve put everything on hold and I don’t think I will be able to do it this year.”
Ms Bannister had planned to leave work in August to look after and spend time with her elderly mother, who suffers from dementia. She had planned to cash out her £50,000 tax-free lump sum, but said she feared it was the wrong time to draw money out with inflation so high.
“I was in a complete and utter state at the beginning, but I’m getting my head around it,” she said. “I understand that it’s best to leave it invested in the hope it will recover. But that makes me really nervous, because it could be hit more than it already has been and I will end up with even less.”
Ms Bannister said she now expected to keep working until March 2023.
Pete Hykin, co-founder of Penfold, a pension provider, said that those reaching retirement should consider working longer or at least drawing out less than they had initially planned while relying on other forms of income. “By doing this, your pension pot can stay invested for a little while longer, giving you the chance to ride out this period of volatility,” he said.
There is no guarantee the situation will have improved by 2023, however.
Savers approaching retirement should typically make sure their funds are invested in safer assets to provide a degree of protection from market volatility, Mr Hykin added, though this strategy has not paid off this year. “Unfortunately, current market conditions are having an impact across all risk levels and so thinking tactically about when and how you’re going to withdraw is extremely important,” he said.
Alex Hatfield, of The Private Office, a financial adviser, said that there had been a “perfect storm” in which nearly all investments would have fallen in value.
“It is a very psychologically difficult year for a lot of people,” he said. “This is the year where those basic rules about investing really come into play: don’t panic, don’t be a forced seller in a depressed market if you can help it, and question whether you really need to take that money right now.”
Sue Maydwell of Tideway, a financial planner, advised DIY investors to take control and buy rising stocks.
“Not all share prices are collapsing,” she said. “Higher risk-free returns and a change in sentiment are causing a reality check on many highly valued speculative shares, but stocks such as banks, energy companies and insurance companies are rising this year. To make gains and avoid significant losses, you generally need to consider investing actively and avoid index funds, which track entire markets.”
Finn Houlihan, of wealth manager Arlo Group and consultancy ATC Tax, said that though this is a “tough” year to retire, those who have a plan should stick to it – as long as they are receiving the income they require for the lifestyle they want to lead in retirement.
Those who are concerned about budgeting should split their savings into different sources of income, combining an annuity – which provides a low but guaranteed income – with stock market investments, Mr Houlihan said.
“One important step is to ensure you don’t have all your eggs in one basket,” he said. “For example, those with a lower risk tolerance may want to take out an annuity, and refrain from being too aggressive with drawing down their pension as cash.”
*Not her real name