Join our community of smart investors

Protect your retirement savings from the coronavirus

Make the right pension decisions to protect your retirement savings
April 2, 2020

Many people's financial security in later life has been thrown into question following sharp drops in the value of pension funds, as markets plummet due to the coronavirus crisis. And many companies are axing their dividends to conserve cash, meaning that those in retirement who rely on these for income may face a reduction. But with some prudent management, you should be able to mitigate the effects of the current market storm. Markets tend to recover over the longer term, so with the right strategy you don't need to realise large losses.  

Income drawdown

If you rely on dividend payments for your retirement income you might experience a sharp reduction in the amount you receive this year because, as business activity stalls, companies are slashing dividends to protect their balance sheets. It is not yet clear how extensive the damage to dividends will be, but broker AJ Bell estimates total dividend cuts in the UK could come to as much as £30bn if there are four months of coronavirus-related business disruption. That's one-third of the FTSE 100 index's projected dividend total for this year. 

If you think that the income you will receive this year from dividends will not be enough to live on, consider taking money from cash reserves. Advisers suggest that everyone holds at least six months of their expenditure in cash to cover emergencies – and, if you are in retirement and reliant on your investments for income, maybe more so that during periods of market turbulence you don't have to draw on your investments. You should avoid selling equity investments that have suffered heavy losses as these are only paper losses until you sell them. If you hold on to them and markets go back up you will not have made any losses. It is not clear when this will happen, but if you hold equities you should have a long-term investment horizon and be able to wait for the market to recover. 

“Cash reserves exist for times like this,” says Tom McPhail, head of policy at Hargreaves Lansdown. He also suggests that if you hold gilts (UK government bonds) in your pension now might be a good time to sell them to raise cash. The Bank of England base rate has been slashed to historic lows of 0.1 per cent so gilt yields are very low. 

Helen Bradshaw, portfolio manager at Quilter Investors, says that investors who solely rely on UK equities for income in retirement should diversify their sources. “Infrastructure is an asset that tends to be less correlated to the wider stock market and its strong income-generating characteristics will provide investors with sustainability when it comes to income," she explains. "It also brings an added layer of diversification and liquidity to a portfolio as this asset tends to be available through investment trusts that can be bought and sold during market hours."

Mr McPhail also suggests trimming your outgoings wherever possible, although this might happen without any concerted effort due to reduced activity during the lockdown. He expects that the fall in dividends will last for around a year, but is unlikely to be a long-term problem. 

 

Approaching retirement

If you are approaching retirement and planning to take 25 per cent of your pension as a tax-free lump sum, if your pension's value has dropped substantially consider waiting a few years before drawing it to allow the value to recover. That way you will draw more, because 25 per cent of your pot will be worth more, and you will also get a larger chunk of money tax-free. 

If, however, the value of your pension was previously above the lifetime allowance, but has dropped to within it, and you are over the age of 55, consider withdrawing the money as a lump sum now to avoid punitive charges when the value of your pot rises again. The pensions lifetime allowance is £1,055,000 and rises to £1,073,100 in the 2020-21 tax year. If the value of all of your pension benefits, across all schemes, exceeds the lifetime allowance, any excess attracts a tax charge of 25 per cent if it is withdrawn as income, or 55 per cent if it is withdrawn as a lump sum.

If you are soon to retire consider delaying it, if possible. “These volatile markets are understandably concerning, but it is important not to panic," says Jonathan Watts-Lay, director at financial education provider WEALTH at work. "Instead, consider using your state pension and other assets for income in the short term, or even delaying your retirement, to give your pension time to recover.” 

You also need to be on the lookout for potential scams. So, for example, if anyone cold calls you trying to sell you a pension product, hang up straight away because pension cold calling became illegal in January last year. And if someone tries to offer you a financial product that seems too good to be true, it almost certainly is. See more on how to beat the scammers in Investors Chronicle of 28 February 2020.

The Financial Conduct Authority (FCA) and The Pensions Regulator have found that victims of pension scams could lose over 20 years’ worth of savings within 24 hours. So, whatever you plan to do with your retirement savings, check whether the company you intend to commit your funds to is on the FCA's register of authorised firms. You can find this at register.fca.org.uk. The FCA’s ScamSmart website, meanwhile, has a list of companies that are operating without authorisation or running scams at www.fca.org.uk/scamsmart.

 

Low annuity rates

Annuity rates are currently near all-time lows so, although whether you take this guaranteed form of retirement income ultimately comes down to your individual circumstances, it is not currently an attractive option, especially if you have only just reached age 55 – the earliest at which you can withdraw money from pensions. Annuity rates change frequently, but, as of 19 March, the best rate for a 55-year-old buying a single life level annuity was only £3,657 a year for a £100,000 pension pot. If you’re age 65 and buy an inflation-linked annuity, meanwhile, you might only get £3,027 a year. For many people, accepting the uncertainty of equity markets and staying invested via drawdown is likely to make more sense – if they have a large enough portfolio and assets to do this.

David Gibb, chartered financial planner at Quilter Private Client Advisers, adds that if you are 55 years old it would be “ridiculous” to buy an annuity now as you would not be able to benefit from higher rates down the line. 

 

Best annuity rates  

Type of annuity

Age 55

Age 60

Age 65

Age 65

(smoker*)

Age 70

Age 75

Single life, level, no guarantee

£3,657

£4,070

£4,752

£5,146

£5,637

£7,017

Single life, level, 5 year guarantee

£3,651

£4,060

£4,725

£5,129

£5,579

£6,868

Single life, RPI, 5 year guarantee

£1,746

£2,184

£3,027

£3,232

£3,924

£5,004

Single life, 3% escalation, 5 year guarantee

£2,044

£2,488

£3,136

£3,549

£3,976

£5,320

Joint life 50%, level, no guarantee

£3,270

£3,731

£4,261

£4,536

£5,015

£5,849

Joint life 50%, 3% escalation, no guarantee

£1,779

£2,164

£2,678

£2,951

£3,371

£4,344

Source: Quotes generated on 26 March 2020 using Hargreaves Lansdown's online annuity quote tool, which compares the rates available from the UK's leading annuity providers. All quotes are based on an average postcode and paid monthly in advance. The joint life quotes assume the spouse is three years younger than the person buying the annuity.

 *Smoker annuity based on a 65 year old who has smoked 10 cigarettes a day for the past 20 years and drinks 15 units of alcohol a week.

 

Opportunities for long-term investors 

If you have a long time until you retire, and so a long-term investment horizon, you should not hold back from investing in pensions because of market turbulence as you will miss out on valuable tax relief. You get tax relief on pensions at your marginal rate so, for example, if you are a higher-rate taxpayer and pay 40 per cent on your top earnings, your investments would have to fall 40 per cent before you actually suffered a loss in real terms at that point in time. Although you are taxed at your marginal rate on pension withdrawals other than your 25 per cent tax-free entitlement, the funds within your pension grow tax free.

You also have an opportunity to invest in markets at a much lower price than two months ago. It is understandable to feel nervous about investing when markets are extremely volatile and you don’t know how much further they will fall: it is unclear how long it will take for the virus to peak in major economies and when they will open up again. But markets should pick up at some point and it is good to be already invested when this starts to capture as much growth as possible. 

It might be a good idea to invest your self-invested personal pension (Sipp) via set monthly instalments rather than in lump sums. This is because if markets fall further your set amount of money will purchase more shares or units. Most Sipp platforms facilitate automatic monthly transactions so you do not have to worry about the administration of adding money each month. See the issue of 27 March for more on on how to drip feed money into distressed markets

Calculations by Hargreaves Lansdown show that stock market corrections, such as the one in the first quarter of this year, can pave the way for strong investment opportunities. For example, if you had doubled your monthly investment to £200 in each of the months that the FTSE All-Share index dropped by more than 5 per cent over the last 20 years, your portfolio would be worth 13 per cent more than if you had invested £100 every month over that period.