Is coronavirus affecting your pension?

The coronavirus pandemic has derailed almost every aspect of our lives. And our pension savings are no exception.

The impact of Covid-19 has not only meant a downturn in stock markets, but it’s also caused a surge in people falling out of work. Both of which could have a significant impact on investors’ retirement stash – whatever your age.

So what should pension investors do?

If you’re a long way from retirement

Stock market ups and downs are nothing new and it’s something you have to accept if you invest. If your pension pot’s taken a hit, and you’re not planning an early retirement, you’ve still got time on your side.

The past has shown that stock markets have recovered and delivered long-term gains. Take the 2008-09 global financial crisis. Peak-to-trough, the FTSE All Share dropped in value by almost 50% over the 18 months from October 2007 to March 2009. But by 2014, five years on from the 2009 trough, it had recovered and was over 30% higher than the October 2007 peak.

Keep in mind that history doesn’t always repeat itself. Past performance doesn’t tell us what will happen in the future.

It’s important to look past short-term fluctuations when investing for long-term targets like retirement – even when certain events cause the value of your pension pot to bounce up and down.

A falling stock market could actually benefit those saving regularly. Drip-feeding contributions into a volatile market could mean the average price you pay for your investments ends up being lower than a single lump sum investment. Investors average out the price of buying investments and benefit from a phenomenon known as ‘pound cost averaging’.

This means your investment buys more units or shares when the price goes down, letting you smooth out the returns from investing in the stock market. However, it should be remembered that if the market rises above the original price, fewer units are purchased.

Learn more about the power of compounding

Holding your nerve is probably the biggest challenge facing those with at least 10 years to retirement. It can be painful seeing your pension fall in value, but remember not to panic.

If you’re close to retirement

If you’re approaching retirement, you’re probably most vulnerable to a stock market fall as your investments will have less time to hopefully recover. Now is a good opportunity to review your pensions and where you're invested.

If you need to take money from your pension in the next few years, shifting your investments so they line up with how and when you plan to retire is sensible. You could think about de-risking your portfolio a bit. Perhaps by selling some higher risk investments or shares and moving them to lower risk investments like bonds or cash.

This doesn’t necessarily mean selling investments straight after a fall though. You could consider building up cash over time using your investment income and saving the cash rather than re-investing it.

Lots of workplace pension plans will actually start de-risking your investments as you approach the retirement age you’ve set, which could mean your pension has fallen less.

Remember though, this age might be something you set with your employer and pension provider years ago. It could no longer be accurate or working in your best interests, particularly if you’re not planning to retire any time soon. Contact your pension provider if you want to check this.

More on preparing for retirement

FTSE All Share with dividend reinvested from 2005 to 2015

Past performance is not a guide to future returns. Source: Lipper IM. 1 January 2005 to 31 December 2015.

Is it a good idea to delay retirement plans?

If you can afford to, you might want to think about holding off on accessing your pension. Depending on how much you want to access and the pension option you choose, you could end up limiting what you can pay-in in future. Or even settling for a tax-free cash amount that could potentially increase when the market recovers.

If you’re out of work and approaching retirement

Redundancies for those aged 50 and over has remained the highest among all age groups throughout the pandemic. And compared to August - October 2019, levels have increased by a whopping 144% for that age group.

If you’re out of work or unemployed because of the coronavirus pandemic, this might have increased pressures on your finances. And if you’re over 55, you might be tempted to raid your pension to make ends meet, especially if you don’t have savings to fall back on.

Understandably, you might have no choice. Just remember, taking large one-off withdrawals could push you into a higher tax band, and you might have to pay emergency tax on your first taxable pension payment.

Find out about our retirement services

If you’re semi or fully retired

If you fall into this camp, it’s your income that you need to think about, which will depend on how you’ve chosen to access your pension.

If you have enough secure income, say from the State Pension, a defined benefit pension or an annuity, then you should be able to shrug off any market turbulence. If you have a drawdown pension, then reducing or stopping withdrawals, or only taking the income naturally produced by your investments, could help you to ride out any storms.

The bigger worry is if your strategy involves selling your investments regularly to generate your income. You’ll be forced to sell at lower prices. This is dangerous and can mean irreparable damage to pension funds, the upshot – running out of money sooner than planned.

Redundancy levels by age (16 and over)

Source: ONS, Labour Force Survey, Redundancy levels by age for those aged 16 and over. December 2020.

Lots of drawdown investors might not have experienced a falling market before, so it’s likely to be an unsettling time. Buying an annuity could still be a viable option, but it doesn't need to be an all-or-nothing choice. Buying several smaller annuities using a bit of your pension at a time allows you to hedge your bets and diversify your income. Remember, once you set up an annuity it can’t usually be changed or cancelled, so it’s important to consider your options carefully.

Will the pandemic change our outlook on retirement?

We think there are three questions to ask yourself when thinking about your retirement.

1. When and how do you want to finish work?

In recent years lots of people have been choosing to phase out of work and semi-retire first. But as a result of the pandemic, people are now planning to work longer and retire later.

Research suggests that 1 in 8 UK adults over 55 who expect to retire in the future are delaying their retirement plans due to coronavirus. Undoubtedly during these uncertain times it can be hard for people to think about giving up the security of a job. And many might be wondering if now’s the right time to reduce their hours and the size of their pay cheque.

2. Where are you going to live?

Downsizing is a pivotal part of some people’s retirement plan. Two years ago, 3.1 million households aged 55 and over were looking to downsize in the future. But people might well re-think their plans of moving to a smaller house. The idea of giving up a spare room for the grandkids to come and visit, or perhaps relocating away from friends and family might seem less appealing now.

On the other hand, for some, the opposite could be true. If people need to free up cash, with the current stamp duty holiday (to 31 March at the time of writing) and house prices broadly increasing, it could seem like a good opportunity to cash in.

3. How much income will you need?

People are being more frugal with their money. Over half of the nation are spending less than they normally do. When this is all over, there could well be the potential for more permanent changes to the way we spend. Investors might find they don’t need to spend as much. That in turn could mean higher contributions into pensions and lower withdrawals – allowing retirees’ pension pots to potentially last longer.

The government provides a free impartial service to help you understand your retirement options. Find out more

This article is not personal advice. If you’re not sure if an investment is right for you, please seek advice. All investments can fall as well as rise in value so you could get back less than you invest.