The Impact of COVID-19 on your Pension
The impact of COVID-19 has left many concerned with not only their immediate financial well-being, but the investments and pension pots that people have worked so hard to accumulate over the years, and understandably so. By the end of March, the FTSE 100 had experienced its worst quarter since 1987, seeing a reduction of 25%, while the FTSE 250 experienced an even larger reduction of 31%.
Seeing falls of this magnitude, together with media coverage of nothing but doom and gloom, is enough to alarm even the most cool headed investor. In times of crisis and when the future ahead of us is so uncertain, it’s important to remember the following:
Keep calm and ride the wave…
It could be tempting for savers to make rushed decisions to withdraw or dis-invest their pension savings. Doing so at a time when the market is experiencing such volatility, could result in crystallising losses, as the funds wouldn’t be given the chance to recover. Remember, the only ones that get hurt on a roller coaster, are those who jump off!
At BFP, we are finding that a lot of our clients’ regular spending has reduced significantly due to the current climate. With this in mind…
If you are saving for retirement, you may be nervous about continuing to contribute at the moment. It’s important to remember that pension savings, such as any investments, are usually a long-term bet. By continuing to contribute, you are safeguarding your future.
If you are approaching retirement you could benefit from delaying access to your pension in order to allow the funds to recover as much as possible. You may also want to postpone any plans for withdrawing a lump sum as you may see significant falls in value as a result of current stock market volatility and this could negatively impact your future income levels as a result.
If you have already reached retirement, you could benefit from pausing or reducing withdrawals, if possible, in order to give your funds longer to recover from current stock market volatility.
Diversification is key…don’t keep your eggs in one basket
The current market uncertainty caused by COVID-19 is a perfect example of why diversification is so important. Times like these can be cause for concern for many, as they worry how to keep their pension pot safe. The key is to build a diverse portfolio with a mix of different investments that suit your attitude to risk. By investing in various asset classes you are spreading the risk, which helps smooth out the peaks and troughs to hopefully generate more consistent investment returns and protect the capital in these turbulent times.
I have a Defined Benefit (DB)/ Final Salary scheme, will it be affected?
Those with DB pensions are highly protected against negative effects on income, considering the guaranteed nature of their benefit and the provision of the Pension Protection Fund (PPF) for these schemes if insolvency occurs. Most investment risk is borne by the scheme or your employer.
Changes to the State Pension could be on the horizon…
While State pensions are not affected by stock market fluctuations, there are talks of upcoming changes to the current Triple Lock system. While any changes have yet to be confirmed, it has been suggested of replacing the triple lock with a ‘double lock’. This would ensure that the state pension continues to rise in line with either wage growth or the Consumer Prices Index (CPI), whichever is higher, and not the guaranteed 2.5%. This would mean that it would still rise to prevent it losing value in real terms, though the increases may no longer outstrip true inflation
The aim would be to help to share negative economic impacts more fairly between generations by reducing the financial burden on the workforce and to help to put the country’s public finances on a sounder footing.
Remember, before making any major decisions about your pension, it is important to get independent guidance or advice. If you have any queries please do not hesitate to contact us at BFP.
