If you’re on the verge of retirement, the recent fall in markets will have been worrying to watch.

For increasing numbers of people, income in retirement depends on the value of a pension pot that builds over their working life and is invested in assets like shares and bonds. As markets have fallen, so has the income these pots will generate.

If you’re close to what you hoped would be your retirement date you may need to redraw those plans and alter your expectations. But even with just a short time until you stop work, taking action now can help to maximise what you have saved and keep your retirement income hopes on track.

Income options: the impact of market falls

There are various ways you can turn your pension pot into an income. ‘Drawdown’ is increasingly popular - this is where your pension pot remains invested and those investments are managed in a way that produces a flexible income.

Falls in markets are likely to lower the potential income those in drawdown can expect in the years ahead or, if income is maintained at the same level, their pot will run out sooner - but even those who do not stay invested in retirement face a hit to their income from the current crisis.

Annuities are an alternative way to turn pension savings into an income. Instead of leaving money invested, the money you have saved in a pension is exchanged for a guaranteed income stream. The level of income you get from an annuity depends on the value of your pot, which may have fallen recently, but also on returns from financial assets which are used to work out annuity rates. The returns from these have been falling in the crisis as well.

Each method of getting income has benefits and drawbacks. Annuities offer a monthly income that is guaranteed, no matter what markets do, but the money you use to purchase an annuity no longer belongs to you. Money invested in drawdown, on the other hand, is still yours and anything left in your pension when you die can be passed on without Inheritance Tax applying, but the income you get depends on investment returns, so can fluctuate - it is not guaranteed.

You don’t have to choose just one and can mix different income options in a way that suits you. You might want to cover essential spending with an annuity, which is guaranteed and provides peace of mind, but be happy to leave the rest of your pot invested, where it has the chance to grow and recover losses. You can read more on retirement income options here, and the government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online or call on 0800 138 3944.

To help you see the level of income you might be headed for, Fidelity has produced a Retirement Income Estimator. You can enter details about your pension pot and the age at which you wish to retire. It will show you the income you could expect from both an annuity and drawdown, but it also allows you to mix the two in different proportions. If you want to get an idea of the income you could expect from drawdown, and how long your money might last in retirement, you can also check our Pension Drawdown Calculator.

Delaying retirement: improving your income potential

No one likes the idea that their hard-won retirement will have to be delayed but there can be valuable long-term benefits from doing so. Every extra year that you work is a year that you don’t have to fund from retirement savings, but it’s also an extra year in which you could build your retirement pot.

The ongoing pandemic has forced all sorts of changes to our lives - including more flexible working. Could these help you eke out an extra year of work? Is working longer easier to take if there’s no commute to deal with, or if you can reduce your hours a bit? It may be worth approaching your employer to discuss these options.

To work out the benefit from working longer our Retirement Income Estimator is again useful. Just use the ‘edit’ button to alter the age at which you hope to retire and the expected level of your pension pot as a result of working longer.

For example, someone with £300,000 in the pension pot who aims to retire at age 66 with a roughly equal mix of annuities and drawdown might expect an annual income in retirement of £14,194, providing they have not taken any tax-free cash. If they were to delay retirement by one year, and managed to grow their pot by £10,000 of pension in that time, their estimated income would rise to £15,104.

Tax-free cash - take only what you need

One of the key decisions those at retirement need to make is what level of tax-free cash to take from their pension pot. We are normally all allowed to withdraw 25% of our pension tax-free from the age of 55. While many value the cash boost this provides, any money withdrawn lowers what’s left in your pot to generate an income in retirement - which is what your pension is for, after all.

If you don’t need all your tax-free cash it can be beneficial to leave it where it is. Don’t worry, you will not lose the tax-free benefit because your future pension withdrawals can still benefit from the tax break, while money left inside your retirement fund has the potential to grow tax-free from investment returns. 

By engaging with your retirement income options now, you’ll be better prepared for the years ahead, no matter how the current crisis plays out.

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change. You can't normally access money in a pension until 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.