Coronavirus: how are my pension savings affected and what should I do?
Falling markets will have taken a bite out of your pension savings. Here are the key questions to consider.
The Covid-19 crisis will inevitably have had an impact on your pension – both on the value of your holdings, as financial markets have fallen, and on your ability to continue saving. But now is not the time for rash decisions. Take your time to assess your position and seek professional advice if necessary.
How are my pension savings affected and what should I do?
This depends on what kind of pension you have. If you’re in a defined-benefit or final-salary scheme at work, your pension is guaranteed. The only danger is that your employer goes under and is therefore not around to meet its pension commitments. In which case, the Pension Protection Fund, the industry lifeboat scheme, would step in. It covers pensions in full for most of those already retired, as well as the future pensions of those yet to retire, albeit with a reduction of around 10%.
By contrast, if you’re in a defined-contribution scheme, either at work or through a personal arrangement, the investment risk falls on you. The market turmoil of recent weeks will have reduced the value of your savings.
The impact of this depends in large part on your time horizon. If you’re still some way off retirement – five to ten years or more, say – there is plenty of time for your savings to recover. Your best option is to do nothing, at least until the turmoil has passed. At this stage, review your pension plan to see whether you remain on track.
If you’re closer to the time when you are expecting to begin drawing on your savings, don’t panic. If you have a professional managing your money – a company pension scheme manager or a financial adviser, say – they may already have shifted much of your savings out of the stockmarket in order to prepare for retirement. And if you are still heavily invested in equities, there may still be time for your pension fund to bounce back.
People in this position will need to consider their options carefully over the next few months. You may want to increase pension contributions or delay your retirement. Take professional advice if you’re unsure, especially if you’re very close to your retirement date.
Should I continue contributing to my pension given all the volatility?
Yes, if you possibly can. Pensions saving is a long-term pursuit and regular contributions benefit from the effect of “pound-cost averaging”: your monthly investment goes further when the markets have fallen.
Remember, 5 April is the final day of the 2019-2020 tax year, for which most people have an annual pension saving allowance of up to £40,000. For most people with allowance remaining, there is no need to change your plans because of Covid-19.
I won’t have spare money to keep saving for now. Can I suspend my contributions without penalty?
If you have an individual plan, such as a stakeholder or personal pension, most pension providers will allow you to reduce or suspend regular savings without any penalty, but check with your provider to be sure. You should also be able to restart or increase your savings without charge once you’re in a position to do so.
If you’re a member of a workplace pension scheme, it may be that you’ve been furloughed as part of the government’s scheme to encourage employers not to let their staff go. If so, your employer is entitled to claim for the cost of paying up to 80% of your wages, up to a maximum of £2,500 a month.
Your pension contributions will then be deducted from your wages in the normal way and the government has also agreed to cover the cost of employers’ pension contributions through these arrangements. Any member of a workplace pension scheme, whether furloughed or still in normal employment, can opt out at any time. But if you can stay in the scheme, it makes sense to do so, otherwise you’ll miss out on your employer’s contribution.
I’m now short of money. Can I access my pension savings?
Unfortunately not. There are very few circumstances in which you can access pension savings before the age of 55 without paying a substantial tax penalty and financial hardship is not one of them. If you do cash in your pension, you will hand over up to 55% of the money to the taxman.
Look out for scam artists claiming to have found a way round the rules; these con men are cashing in on people’s vulnerability and they’re lying to you. If you deal with a “pension unlocking” firm, you’ll be charged extortionate fees and you’ll still have to pay the tax penalty.
I have an income drawdown plan. What action should I take?
There is no single right answer, because it will depend on how your pension fund is invested. Broadly speaking, however, the more you take out of your savings when they’ve taken a financial hit, the less potential there is for you to benefit from any recovery in the markets. It therefore makes sense, if you can, to reduce your income to the minimum you can manage, perhaps falling back on other assets if you have these.
You may also need to assess how you take income from your savings. Many companies are cutting or cancelling dividend payments, which will reduce the income your portfolio generates.
You may have to cash in investments in order to maintain your current income stream, but this means crystallising portfolio losses before the benefits of any recovery come through.
How have annuities been affected?
If you’re already receiving annuity income from your pension, it will not be affected by this crisis; your provider will continue to pay you as usual. However, if you have been considering buying an annuity in the near future, bear in mind that the income on offer has fallen sharply in recent weeks.
Annuity rates are closely linked to gilt yields, which have fallen to record lows. A typical annuity for a 65-year-old man now pays around £4,900 a year for each £100,000 of pension savings, down from around £5,100 at the start of the year.
You may now wish to consider delaying your annuity purchase. If you’re not sure how to proceed, take advice from a specialist annuity adviser.