Keith Bonner, Managing Partner and Independent Financial Adviser at Pembroke Financial Services, Pension advisers serving clients throughout Sussex and the surrounding counties comments “You may be worried about the impact coronavirus will have on your pension – and for most people short-term activity won’t have an impact – but there may be some situations where adjustments are necessary.”
The pandemic has created uncertainty in economies around the globe. As a result, stock markets have experienced shocks which, over the past few months, have produced significant falls. Fears of a recession following the pandemic are a cause for concern.
Keith asserts “It’s natural to be worried about what the impact on financial markets means for your future. Understanding what the change means, and where adjustments may need to be made, can help you plan for your pension and retirement with confidence.”
What impact has the pandemic had on pensions?
For the vast majority, your pensions will be invested. This gives your pension fund the chance to grow over the several decades that you are likely to be paying into your pension. However, this clearly means that your retirement savings are exposed to market volatility and in the past few months this will mean pension fund values are likely to have fallen.
The full effect will depend on where exactly your pension is invested. It is important to keep in mind that a pension doesn’t just hold stocks and shares and that other investment ‘assets’ are used to create diversified, balanced portfolios. So, whilst news updates may say the stock market has fallen 20%, it’s highly unlikely your pension will have suffered a fall of the same measure. As at 1st May 2020, Pembroke’s Prestige Balanced portfolio ( geared to the ‘medium risk’ investor) , had returned -8.9% year to date compared to the UK ‘market’ return of the FTSE 100 index return of -22.7% ( source; FE Analytics ).
Keith says “If you’re worried about your pension, it is most definitely worth checking the value. Bear in mind, however, that short-term volatility is to be expected at the best of times. Keep the bigger picture in mind and look at the value of your pension with your retirement plans in mind.”
The impact that the pandemic will have on your retirement plans will depend on what stage you’re at.
1. If your retirement is still several years away
If retirement is still some way off, the current market activity shouldn’t affect your pension and retirement plans.
You should always invest with a long-term plan in mind. This provides an opportunity for peaks and troughs to smooth out to deliver gradual investment gains, when you look at the bigger picture. Whilst past performance isn’t a reliable indicator of the future, previous market corrections and crashes have always been followed by a period of recovery. The 2008 Credit Crunch was followed by one of the longest stock market ‘bull runs’ in history.
So, whilst it’s natural to worry if your pension value has fallen, stick with your long-term plan.
2. If you hope to retire soon
If retirement is nearing, it’s natural to worry about your pension in any circumstances. It’s a life milestone that means we often have to change the way we view income and finances and consequently a stock market crash or correction just before the date can be desperately worrying.
First, put the stock market correction into perspective. You’ve likely been saving into a pension for many decades and while no one wants investment values to fallat any stage, when you reflect on the gains you have made over time , you’ve probably done pretty well returns-wise.
Second, you will need to look at your pension value in the context of your retirement plans: Will the current value of your pension provide you with the income needed throughout retirement? If not, what is the shortfall? This can be difficult to weigh up, as there are numerous factors to take into consideration.
Keith says “Here is where working with a professional Independent Financial planner can help you understand how the pension figure translates to a retirement lifestyle. If there is a shortfall, there are often steps you can take to bridge the gap, from delaying retirement to using other assets.”
Depending on your goals and desired retirement lifestyle, your adviser may well have already ‘lifestyled’ your pension by ensuring that your tolerance to investment risk is properly catered for in the ongoing management of your pension savings. The idea being to preserve the savings you already have as you near retirement. If this is the case, it’s likely the impact on your pension is lower, as you will be less exposed.
3. You’re already retired
If you’re already retired and choose to access your pension flexibly using Flexi-Access Drawdown, the current activity may have an impact. This is because your pension savings remain invested with the goal of delivering returns whilst you’re retired. However, the flip side of this is that you’re exposed to market volatility.
The important thing to recognise here is how your withdrawals will have an impact in the long term. Making withdrawals whilst the market is low means you must sell more units to secure the same income.
Keith comments “This can deplete your retirement savings quicker than expected. As a result, it’s worth reviewing how much you’re withdrawing. So, if you are able to reduce pension income withdrawals, or even temporarily pause them, this can help to minimise the impact on your pension savings in the long term. It may well be that you have other assets, such as cash savings, which can be used to tide you over until the markets begin to recover.”
If you find yourself in this situation, please call or email. There are very often solutions which can help you to maintain both your lifestyle and your future.
Have confidence in your retirement aspirations
Whether you’re already retired or you’re still working towards that goal, it’s important to have confidence in your plans. This includes understanding the means your pension will provide you with and how market shocks would potentially impact those goals over the short and long term.
This is where professional financial planning can help. If the recent volatility means you have concerns about pension investments, we are here to help. In some cases, it may simply be understanding how pensions will grow over the next ten years, in others, adjustments may be necessary, such as reassessing your risk profile or increasing contributions.
Please contact us to discuss your pension and retirement goals. Pension advice leading toward, and at, retirement. Call 01273 774855 or email email us by clicking here.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.