How the pandemic has affected your pension scheme

Chancellor Rishi Sunak is contemplating ending the triple-lock guarantee © Getty

(Image credit: Rishi Sunak © Comic Relief/BBC Children in Need/Comic Relief via Getty Images)

published 30 June 2020

Britain is gradually returning to work, so this is a sensible time to review the effect of Covid-19 on your pension planning. Firstly, if you’re a member of a defined-benefit occupational pension scheme, is the employer that stands behind it still solvent?

With company failures set to increase, the guaranteed pensions that such schemes offer may now be in doubt. The golden rule in pension planning is that a defined-benefit scheme, with all the certainty it offers, is almost always a better option than other types of arrangement. However, if your employer goes under and there’s not enough money in the scheme, your pension could be threatened.

A lifeboat for your scheme

All is not lost if your employer does go bust. The Pension Protection Fund (PPF), the industry lifeboat scheme, will then step in: it usually protects 100% of pensions already in payment and 90% of the pension entitlement savers have built up so far if they’ve not yet retired. However, if you’ve yet to claim your pension, the PPF does have limits. For example, someone retiring at 65 would not be able to claim a pension of more than 90% of this year’s cap of £41,461, no matter how much entitlement they’ve built up. If your pension is worth significantly more, you could really lose out.

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People in this category who are worried about their employer’s solvency therefore need to take independent financial advice on whether to transfer their defined-benefit savings to a defined-contribution scheme. You’ll forfeit the certainty that the former offers, but for those who would be substantially out of pocket in the PPF, this may be a price worth paying.

Meanwhile, savers with defined-contribution pension plans have their own problems. The stockmarket declines of recent months – UK shares are down around 16% since the start of the year ,while the US is off by 10% – will have hit many savers’ funds. Some fixed-income assets, particularly at the less risky end of the spectrum, have been more resilient, but the yields they offer have fallen sharply.

If you have some way to go before retirement, you can afford to take a sanguine view of this volatility, since there is plenty of time for your funds to recover. But it is still worth reviewing your pension investments regularly.

Are your plans still on track, are your chosen funds delivering competitive returns and is the way you have allocated your money still appropriate? Take independent financial advice if you’re unsure.

For those closer to retirement and those who have begun withdrawing an income from their pension funds through income drawdown schemes, the market setbacks of recent months will be a more pressing issue. Taking financial advice will therefore be even more important.

If you’re in the former camp, take a detailed look at your pension planning – you may need to reconsider your retirement finances, or even when you’ll be able to retire, or you may be able to start making up any shortfalls with additional contributions. For those in drawdown, reducing the income you take from your pension – perhaps drawing on other assets or entitlements – could give your savings more time to recover. Or you may need to consider more radical steps. It may be time to think about an annuity purchase, say.

State pensions will fall

Finally, don’t overlook the potential impact of Covid-19 on state pensions. For many people, the state pension – worth £9,100 this year – provides an important foundation for their retirement finances. However, state pension increases in the years ahead are likely to be less generous.

The chancellor is thought to be considering dropping the “triple-lock” guarantee – that pensions will rise by the highest of price inflation, wage inflation or 2.5% each year – to protect the public finances in the wake of the pandemic (see page 14). In that case, this element of your retirement income may be smaller than you expect and you’ll need to plan accordingly.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.