Since the Coronavirus outbreak, stock markets have fallen and there is pressure on financial markets around the world. How is the pandemic affecting the health of your pension and is there anything you should be considering currently?
What should I do about my pension if I see the market dropping?
Even though these are unprecedented times, as an investor, it’s useful to put any short-term volatility into historical context, to get the bigger picture, rather than focusing too intently on short-term events and market fluctuations.
Market analysts and investors aren’t infallible, but when something like coronavirus strikes, they become nervous. This is because flight bans, lockdowns and closed borders leading to loss of trade and tourism can pose a threat to companies of any size. So, it’s little wonder that stock markets have fallen and you are likely to have seen a drop in value of your pension pot over the course of the pandemic.
However, it’s worth remembering that the recent falls have come after some very strong rises in recent years. Also your pension pot is unlikely to be invested solely in equities, so a 5% fall in the market does not necessarily equate to a 5% fall in the total value of your pension fund. In fact, the typical pension pot will contain a broad range of assets, which have been identified to fit in line with your attitude to risk, personal objectives and time frames.
A typical pension fund contains around 60%-65% in shares, with the rest in government and corporate bonds, property and cash. In contrast to equities, government bonds have actually increased in value during the crisis.
Will my pension pot ever recover?
Investment requires a disciplined approach and a degree of holding your nerve if markets fall. Experienced long-term investors know that the worst investment strategy you can adopt, is to jump in and out of the stock market, to panic when prices fall and to sell investments at the bottom of the market.
The importance of keeping to your long-term plan is evident by studying the performance of the FTSE 100 over the last 20 years or so. Back in the autumn of 1998, the FTSE 100 fell by 1,000 points, amidst an environment of high interest rates and other threats to UK economic growth. However, it had almost fully recovered by the end of 1998 and the index soared close to 7,000 in 1999. A global slowdown brought it back down to around 3,600 in spring 2003, before taking another five years to climb back to around 6,500. Then, the global financial crisis happened and the index was back at 3,500 in March 2009. After a long haul back, the index was at over 7,000 in January 2020 before the pandemic affected global markets.
Over the last 20 years, despite a variety of market shocks and rebounds, the index still has a long-term growth trend. It's important to remember that some market volatility is inevitable. Markets will always move up and down, but it's important to stick to your long-term plan.
Is now a good time to top-up my pension?
If you have been furloughed during the Coronavirus crisis, as well as your employer receiving a grant from HM Revenue and Customs to cover the lower of 80% of your wage or £2,500 per month, the Government will also pay employer’s auto enrolment contributions, at the minimum rate of 3%. If your employer pays more than the minimum 3%, it’s important to note that the Government will not make up this up.
Providing you are investing for the long-term, you may wish to consider investing more into your pension pot. Even a small increase in contributions could make a difference to your final pension pot, if it benefits from an upturn in the market and makes up for recent losses.
Remember that whatever type of pension plan you hold, you get tax relief at the highest rate of Income Tax you pay, on all contributions you make, subject to annual and lifetime allowances. This effectively means that some of your earnings which would have gone to the Government as tax are diverted to boost your pension pot instead.
You receive ‘relief at source’ if you pay money into your personal pension yourself or if your workplace pension contributions are taken directly from your pay packet. In both circumstances, you automatically receive 20% tax back from the Government in the form of an additional deposit into your pension pot. So, for instance, if you’re a basic-rate taxpayer investing £800 of your take-home pay into your pension, the tax relief would amount to £200. Effectively the taxman tops up your £800 contribution to £1,000.
How do I make sure my pension is protected?
As well as taking a long-term view of your pension, regular reviews are essential to ensure you remain on track with your well-defined plan, in accordance with your objectives and attitude to risk. If there have been any changes in your objectives or circumstances, it is particularly important to review and make any adjustments where needed.
When investing, you have to decide how much risk is right for you. Successfully achieving your long-term goals requires a balance between risk and reward, so you can construct a diversified portfolio with the potential to improve returns that matches your elected level of risk. While a diversified portfolio should incorporate strategies to help reduce risk, it cannot be eliminated altogether. The process of building such a portfolio is very difficult to achieve without professional advice.
Can I get advice about my pension?
In these uncertain times, more than ever, it’s important to take professional independent financial advice, from someone who will help you to make the right financial decisions and identify and meet your goals and aspirations. Research shows that those who take advice are likely to accumulate more wealth, supported by increased saving and investments in equities. Also, those in retirement are likely to have more income, particularly at older ages.
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