COVID-19: what it means for your pension
COVID-19 is having a far-reaching effect on individuals, communities and businesses, which is contributing to turmoil on world stock markets and pushing share prices down.
History shows that stock markets do recover. What we don’t know is when, by how much and for how long.
In the circumstances, it’s understandable to be concerned about your investments but we would recommend that pension savers remain calm, make informed decisions according to their personal circumstances and avoid acting in haste. Speaking to an independent financial adviser can give you peace of mind because you’ve discussed your circumstances with an expert.
Questions and Answers
How will current market conditions impact my pension savings?
Since the spread of coronavirus, we have seen a dramatic fall across most international stock markets which means share prices have fallen and pension pots have suffered a loss in value. However, history shows that stock markets have a habit of bouncing back so recent activity needs to be seen in the context of long-term performance.
What protection is in place for my pension savings?
Pensions are a long-term investment and are expected to go up and down in value to varying degrees and from time to time according to the performance of the underlying assets. Many workplace pensions are protected by the Financial Services Compensation Scheme so you could claim compensation from them (subject to certain limits and conditions. The Financial Services Compensation Scheme does not protect you from falls in value due to stock market volatility or currency fluctuations.
Should I switch my investments to avoid further loss?
If you’re thinking about switching your investment, it’s something that needs to be considered very carefully. For instance, moving all your savings into a cash fund now could mean you lose out on future growth if and when the stock market recovers. Your provider may have an online portal where you can check your pension performance. If you’re unsure how to proceed, you could consider talking to an independent financial adviser from Wren Sterling.
How long before the stock market recovers?
It’s impossible to predict but we do know that stock markets have a habit of bouncing back. For instance, if you look at the performance of the FTSE 100 and other indices on London Stock Exchange, you’ll see how markets have gone up and down since records began, and the long-term trend is upwards. However, it’s generally acknowledged that we’re in exceptional circumstances which are likely to prevail for months if not years, which can be good news if you’re not planning to take your money out in the near future.
I am retiring next year, what should I do?
First of all, don’t panic. Now is the time to take stock of your circumstances and make informed decisions with a cool head. Certainly you should check the value of your pension savings and any other sources of income including the state pension. Then look at your outgoings and calculate how much you think you’ll need.
You can exchange your pension pot for an annuity which pays a guaranteed income for life or you can leave it invested and draw down an income from time to time, whichever option suits you best. Obviously, the longer your money is invested the more it has the potential to grow but it will still go up and down in value from time to time.
Will the amount of pension I receive now be lower because of the stock markets falling?
If you’re in a final salary scheme or have bought a pension annuity, the amount you receive should not be affected by the recent fall in stock markets. If you’re in a defined contribution scheme, the value of your pot may have dropped significantly since the coronavirus outbreak began. History suggests that it will recover some or all of its value when the world gets back to normal although that could take many months if not years.
Could I take money from my pension now?
You can’t normally take money out of a pension until you’re at least 55. If you’re over 55 and thinking of taking your money out, we recommend you talk to an adviser as this could have implications to your income in retirement and may affect your entitlement to certain means tested benefits.
How do current circumstances affect pension transfers? Should I cancel the instruction?
Pension transfers can continue regardless of current circumstances and there is not necessarily any reason to cancel any transfers currently underway. However, everyone’s circumstances are different and you may wish to review your decision with your financial adviser. Remember, the Government has made it a legal requirement to seek financial advice before you can transfer a defined benefit pension worth more than £30,000. This rule is there for your protection, and to make sure you are aware of all the advantages and disadvantages when considering a transfer.
If I cannot afford to make pension contributions now how can I stop these being taken from my salary?
If you want to stop or suspend your pension contributions, contact your HR department at work. If you do stop paying in, you’ll probably miss out on your employer’s contributions too. You could also miss out on any growth in your investment funds as and when the stock market recovers.
If I stop my pension contributions, can I re-start them again at any time?
Yes, most schemes will allow you to re-start your contributions when your finances allow.
Will my employer stop making contributions to my pension if I opt out now because of coronavirus?
Yes, in most cases if you stop paying, your employer stops paying too.
I’m over 55 and being put on unpaid leave from work – can I access my pension to supplement my income? If so, what impact will this have?
Yes, if you’re over 55 you can take money out of your pot as a regular income or in occasional lump sums. However, taking a lump sum could also affect entitlement to certain means tested benefits. The first 25% of your pension is usually tax free but the remainder will be taxed as income. Taking money out will naturally reduce the value of your retirement fund so you need to be mindful of future requirements.
Before doing anything, we recommend you talk to the government’s free Pension Wise service or to your financial adviser.
Remember: The value of an investment can go down as well as up. Past performance is not a guide to future performance.
Source: Wren Sterling
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