Pensions in a crisis:
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Any financial crisis is unsettling but especially when there are so many unknowns. While serving to remind us that investing is for the long term, this isn’t particularly useful for those nearing their retirement. Those who have been planning on drawing their pension imminently will undoubtedly have found themselves in a state of quandary. What should I for the best? Is retirement still an option now? Will any pension planning they had in place be able to withstand the current situation? So, in this blog, we are going to take a look at the effect of the immediate coronavirus crisis on pension investments. We’re also going to take a look at some practical measures you can take to protect your savings; and some helpful tips on what to consider if you’re about to retire.
Will my existing pension plan hold up?
If you already have some pension planning in place, you’ll likely be wondering how well it has stood up in the face of the crisis. As you might expect, the answer to that question will be dependent on your particular plan and what you are invested in. Most ‘good’ plans will have factored in your proximity to retirement and perhaps cash ‘buffers’ will have been built in to protect you against precisely this kind of unforeseen situation.
In addition, you’ll probably have heard financial advisers talking about ‘boring bond investments’ ? Well, these are exactly the type of investments that become ‘exciting’ in a crisis. They suddenly come into their own, offering protection against falling stock markets.
How is the impact of the virus affecting my pension?
How much stock market fluctuations will impact your pension invariably depends on first, what type of pension you have and then what underlying investments you hold. Since April, markets have rallied somewhat and it could be that your value isn’t as bad as you expect. Saying that, its unlikely we are out of the woods just yet and volatility will no doubt continue for a while yet.
Final Salary, or Defined-Benefit Pensions in a crisis
If you have a final salary, or defined-benefit scheme then you can breathe a sigh of relief. These pay a fixed, regular income during retirement and the benefit is linked to how much you earned and how long you have been a member of that scheme for. As such, the amount you receive is unaffected by how investments perform. It’s your employer who bears the risk.
Anticipating your next question (what happens if the company goes bust), your money is protected by the Pension Protection Fund (up to certain limits). This is effectively a lifeboat scheme designed to step in should the company you work for, or previously worked for, fail. No doubt this will be good news for those who working in industries that have been particularly hard hit. Airline and travel industries immediately spring to mind amongst others.
Defined-Contribution Pensions in a crisis
Most people today have defined-contribution pensions. These are usually as part of a personal pension or as part of a workplace scheme. Unlike Final Salary or Defined Benefit pensions, the amount of money in Defined-Contribution pensions directly relate to how much you pay in and how the investments inside it perform. So, it’s the individual who bears the risk.
There’s no sugar coating it – a fall in the markets will generally mean a fall in the value of your defined-contribution pension. So, in this ‘pensions in a crisis’ scenario, it is likely that the overall value of your pension will have fallen. But! we know the current market turbulence will be temporary. While it is true that we don’t know how long ‘temporary’ will be, we do know that the markets recover in time.
So, market volatility generally is less of a concern the longer you have to retirement. It’s not all bad news for those nearing retirement with a defined-contribution pension either. We say this with such confidence because it is unlikely that your pension will be entirely in the stock market. The probability is that much of it will be nestled away in less risky assets – remember those ‘boring’ cash and ‘bond’ types we discussed above! Workplace Pension schemes often reduce the amount of risk your money is exposed to the closer you get to retirement. If you had financial advice, this will have been a given in any pension planning done!
The State Pension in a crisis
You can rest assured as far as the state pension in a crisis is concerned. It is unaffected by market fluctuations. The triple-lock guarantee also goes some way towards offering greater reassurance. As far the current crisis goes, the government is still offering this. So every April, the state pension continues to increase by whichever is the highest amount out of inflation, average earnings or 2.5%.
Your pension if retirement is a long way off
One of the most frequently asked questions about pensions in a crisis is whether money should be moved to less risky investments. It sounds reasonable, so we can understand the temptation. The thing to bear in mind though is that (generally speaking!) the lower the risk, the lower the potential for long-term growth. When you see values nose-diving, cutting your losses and selling your investments can seem like a good idea.
But, while the past is no guarantee of future success, history does tell us that staying invested is the best course for long-term growth. So, when considering changes to your pensions in a crisis, remember to keep an eye on your long-term objectives. An impulsive reaction now might have a far greater impact further down the line…
Your pension in a crisis if you’re about to retire
If you’re approaching retirement imminently and have no time for the markets to recover, you will likely be duly concerned. While there is no telling what the markets will do, there are options available to you.
Your options for accessing your pension remain the same during this time of crisis. For defined-contribution schemes, these include the ability to mix and match any of the following: 1. An annuity – a guaranteed income for life 2. Flexible access (drawdown) – keep your pot invested and withdraw money as and when you need it. 3. Take it as a cash lump sum 4. Leave it where it is and decide later.
Deciding what to do with your pension in a crisis
Making any decision about your pension is difficult, let alone during times of volatile investment markets. So, these are some points you may want to consider when thinking about what you want to do:
- An annuity provides a guaranteed income during retirement. This will remove any concern about future stock market performance BUT would need to be well-timed. Annuity rates are currently at an all-time low, so if this appeals to you, it might be worth delaying this decision until things improve.
- If drawdown appeals to you, bear in mind that although you have flexibility you will be bearing the investment risk throughout retirement.
- If you take your whole pension ‘out’ as cash, the tax-free amount available is usually 25% of the value. The remainder is subject to income tax. So, whilst it may be tempting to ‘cash it all in’ the taxman will be taking a vary large chunk. Its also important to remember that you will need a home for it when it comes out, simply putting it in the bank will likely mean inflation erodes what is left!
- Think about whether you can delay taking your pension. As markets recover given time, the longer you are able to leave your pension funds in a position to enjoy that recovery, the better. Perhaps you will want to review how much money you will need to live on during retirement? You might find you can exist on less than you think to get you over the edge of the crisis. It might be that you’d prefer to work part-time or use other savings to supplement your income. Such actions might allow you to hold off dipping into your pot, giving it time to go up in value again.
Being Objective about pensions in a crisis
Being objective about your pension full-stop is not the easiest of tasks. That’s why many people find the services of a financial adviser helpful, and all the more so during times of crisis. Our job is to make sure your finances are in the best possible position to achieve your long-term goals. But we’re also here to help get them back on track when things go awry. So, if you’re struggling to see the wood through the trees, don’t be scared to pick up the phone and give us a call. We’d be happy to see how we can help.
To speak to one of our friendly financial advisers, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch!
Written by Chris Page
Chris is an experienced financial service professional who joined the business in 2013, as a result of his hard work and dedication he was made a director of the firm late 2014.