Taking pension lump sum could be disastrous

Cashing in pension now could prove a disaster

Anyone considering taking advantage of pension freedoms needs to think carefully whether this is a good time to take money out of the stock market. The recent collapse of share prices around the world mean that cashing in now could be disastrous for your retirement income prospects.

In the past five days the FTSE has fallen more than 6%, and in the past year it has fallen more than 10%. During better days, the market peaked above 7,000, while in the past week they have dipped beneath 6,000. The intervening weeks have seen an unusual amount of volatility as the market deals with an uncertain global economy and pressure from China.

Anyone with money invested in stocks and shares through their pension is likely to be concerned, because on paper they could have lost 10% of the value of their pension pot. It might lead some people to worry that their money should be somewhere less volatile. However, this is dangerous thinking. Leaving the market at a time like this simply crystallises your losses and turns a theoretical paper loss into a real financial one.

If you left the market in the aftermath of Black Monday, you would have missed out on the bounce that happened over the following 24 hours. Of course, there's no guarantee that the market will continue to rise from today, but by leaving your money in the market you have a decent chance of enjoying a recovery. By removing your money at the bottom you are guaranteeing that you will miss out.

Danny Cox, a chartered financial planner with Hargreaves Lansdown told AOL: "There's a natural inclination for people to be unsettled when markets are volatile, but often the best thing is either to do nothing, or if you are more adventurous, consider putting more money into your pension when stocks are cheaper."

Lump sum

If you have a while until you reach retirement age, the advice from the experts is to sit tight. But what if you are over 55 and considering taking a lump sum?

Cox warned that you need to think about this carefully too. Since the beginning of the market crash, the overall value of your pension fund will have typically lost 10%. If you take a lump sum out of your pension now, you will be taking a larger proportion of your savings, so less will remain in the market to take advantage of growth further down the line, and you will be left with less to call on later.

He explained: "People need to understand where their pension is invested, and the impact on their pension pot if they take a lump sum now when the market has fallen so far."

It doesn't mean nobody can afford to take any kind of a lump sum, but it means they shouldn't rush into any decisions, and need to be aware just how big a proportion of their pot they will be cashing in, and the long-term effect of their decision.

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Taking pension lump sum could be disastrous

Pension experts at Mercer have identified the countries with the best pension systems. At number 10 is Singapore.

The system is based on the Central Provident Fund, which covers everyone in a job. Some of the cash can be withdrawn during your working life, and a prescribed minimum drawn down at retirement as an income.

Overall, Singapore scored 65.9 out of 100. It fared well on sustainability measures, and integrity, but relatively low incomes in retirement dragged its combined score down.

The UK scored 67.6 out of 100. The system was ruled to have great integrity, and good incomes in retirement. The overall scores were also up from the year earlier, as auto-enrolment was rolled out further, bringing more people into workplace schemes.

The researchers, however, were worried about how sustainable the system would be in the future. They called for an increase in minimum pensions, and added that more people ought to be encouraged into workplace schemes and persuaded to contribute more to their pension. They also wanted to see more people saving privately for their pension, and working later in life.

In Chile the state offers means-tested assistance, a mandatory centralised pension for employees to contribute to, and there are voluntary employer schemes.

Chile score 68.2 out of 100. Its highest score was for integrity, with another good mark for sustainability. Relatively low incomes in retirement let it down, and the researchers said the biggest improvements would come from raising the contribution levels.

Canada has a universal flat-rate pension - with a means-tested supplement. There’s an earnings-related pension based on lifetime earnings, plus voluntary workplace and private schemes.

It scored 69.1 out of 100. Its best score was for incomes in retirement, while it also performed well for integrity. Its only relative weak point was how sustainable it might be for the future - particularly because older people don't tend to stay in work.

Sweden has an earnings-related system with notional accounts - although this system was introduced in 1999 so it’s still in transition from a pay-as-you go system to a funded one. There’s also a means-tested top up.

Sweden was given 73.4 out of 100. It scored excellently for integrity, and well for sustainability. The overall score was brought down by incomes in retirement, and the researchers called for more workplace and private pensions.

Switzerland has an earnings-related public pension, a mandatory occupational system and voluntary private pensions.

It scored 73.9 out of 100. It fared well for integrity and reasonably well for incomes in retirement. The researchers just questioned its sustainability.

Finland has a means-tested basic state pension and a range of statutory earnings-related schemes. It scored 74.3 out of 100.

It had high integrity scores, with a less positive result for incomes in retirement, and a surprisingly low score for sustainability. The researchers called for higher minimum pensions, higher mandatory contributions and encouraging people to work longer to improve sustainability.

The Netherlands has a flat-rate public pension and quasi-mandatory earnings-related occupational schemes - which are industry-wide defined benefit schemes based on lifetime average earnings.

The system scored 79.2 out of 100. All its scores were high - particularly for the integrity of the system.

The system in Australia consists of a government scheme, a mandatory employer contribution into a pension, and additional voluntary contributions from individuals.

It benefits from the fact that all workers have been automatically enrolled in their company pension schemes for some time, so participation rates are high. The minimum contributions have also been raised recently, which means workers are building reasonable retirement incomes. It had an overall score of 79.9 out of 100, with the only question mark being over sustainability.

Denmark’s system includes a basic state pension, means-tested state top-ups, a fully funded defined contribution scheme and mandatory occupational schemes.

The researchers said it was "A first class and robust retirement income system". It scored 82.4 out of 100, with high marks across the board.


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