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Many over-55s watched their pensions open-eyed earlier in 2020 as the realities of COVID-19 sank into the equity markets. Many pensions are invested in the FTSE 100, for instance, which took a terrible hit – falling from 7436.64 on the 20th February to 4,993.89 by the 23rd March. Thankfully, many markets have been recovering throughout 2020 as national governments have rolled out unprecedented measures to support their economies (e.g. the UK’s Job Retention Scheme and the Business Interruption Loan Scheme).
In the wake of this huge economic damage, however, many people approaching (and also in) retirement are asking what can be done to shield their pension(s) from possible downward performance in the near future. If COVID-19 returns in a “second wave” in the winter, for instance, then isn’t there a chance that another lockdown might be imposed and equities could fall further? If so, how might that affect my pension – and what can I do about it?
Here at Cedar House, our financial advisers offer their reflections on these critical issues. We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
Protection strategy 1: state pensions
To grasp some of the main ways to protect a pension during economic uncertainty, it’s important to first understand the different types of pension. Not all of them are affected in the same way by a pandemic such as COVID-19.
First of all, your state pension is the money given to you by the UK government after you reach your state pension age (i.e. 66 in 2020, which is set to change to 67 by October of this year). The amount you receive is largely based on how many qualifying years of national insurance contributions (NICs) you have accrued. You need a minimum of 10 years to receive anything at all, and you’ll need 35 years to get the full new state pension.
The important thing to realise about your state pension is that it is not directly affected by stock market volatility. If the FTSE 100 goes down, for instance, then you’ll still receive the same weekly amount from the government. As such, one of the best ways to protect your retirement income from a pandemic is to ensure that you build up a strong state pension. If you are in your early 60s with 25 years’ of NICs under your belt, for instance, then you need to build up 10 more years of qualifying NICs to get the full new state pension. This might be achieved by “topping up” previous years through voluntary contributions, or by delaying retirement slightly so that you can build up the full amount through a few years of extra work.
Strategy 2: final salary pensions
Another important type of pension are defined benefit pensions (or “final salary” pensions). With this type of scheme, your employer promises to pay you a guaranteed, lifetime income when you retire. This income is often linked to inflation, and the amount will depend on factors such as how long you worked there and your salary during your career.
These pensions are now quite rare in 2020 and, therefore, are sometimes called “gold plated” pensions. If you have one, then think carefully before approaching someone to help you transfer out of it. This type of pension, again, is not directly affected by stock market volatility. Yes, your employer will have invested the amount in various assets and funds. Yet if any of them do not perform up to standard, then your employer is obliged to make up the shortfall.
Of course, you do need to be mindful that your employer may go bust during a pandemic. This can pose a problem for your pension. There are some protections available through the Pension Protection Fund (PPF), however.
Strategy 3: defined contribution pensions
This is the most common type of pension in 2020, and this usually takes the form of a pension pot which you are your employer build up through regular contributions. These are typically invested in a range of funds (e.g. stocks and bonds) to encourage long-term investment growth.
A pension pot such as this tends to be more exposed to the stock markets. This is not a bad thing, since equity markets have historically shown some of the highest potential for investment growth – even after “crashes” are taken into account. Yet you do need to be careful to make sure your portfolio is properly balanced and diversified, to help protect it from excessive damage in the event of a pandemic such as COVID-19.
Here, a financial adviser can offer a lot of help. They can look at your scheme to ensure it is built on a strong investment foundation, and also help you ascertain whether you are paying a competitive rate of fees. It might be, for instance, that your portfolio needs rebalancing in light of your risk appetite. Financial goals and investment horizon.
Conclusion & invitation
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or email@example.com.