When it comes to COVID-19, the economic fallouts are plentiful, and unfortunately your pension is not immune.
The “triple-lock” guarantee for state pensions is still in place, despite discussions a fortnight ago that it may be scrapped. Nevertheless, when it comes to private or work pensions there are still factors that could affect your hard-earned savings.
If your pension scheme is defined-benefit or defined-contribution will have a significant role to play on the stability or your savings.
Here’s what you need to know – and do – to keep your savings as safe as possible.
If you are part of a defined-benefit occupational pension scheme, your savings are likely very stable. This is because any investment risk is borne by your employer – not you.
However, there are some limitations you should be aware of.
If your employer goes bust The Pensio Protection Fund (PPF) will protect 100% of pensions already in payment and 90% of pension entitlement you have built up so far – if you have not retired.
However, if you have yet to claim your pension, you cannot currently claim more than 90% of this year’s cap - £41,461. This could be an issue if your pension is worth significantly more.
If you do have a pension higher than this threshold and are worried about your employer going under, take independent financial advice on whether to move your savings to a defined-contribution scheme.
If not, sticking with your defined-benefit pension is a smart choice.
If you have a defined-contribution pension plan, your savings are certainly at higher risk, and may have already taken a big dent due to coronavirus. The Stock-market declines of recent months have resulted in a 15% drop in UK shares since January, and significant recovery is not expected until 2023.
However, If you are relatively young and far from retirement you should not be worried. Stock market volatility is normal and markets often rebound quickly. As a general rule of thumb, you should view stock market investments in terms of 5 years, or longer. So, don’t panic, your long-term savings should be safe. The best thing may be to relax and wait for this wave to subside.
Nonetheless, it is still worth reviewing your pension investments. If you are unsure of the security of your returns, there’s no harm taking independent financial advice.
If you are close to retirement on a defined-contribution plan, you may have taken a bigger hit.
Fortunately, the older you get, the more schemes tend to invest in ‘safe’ places such as bonds – which have a far lower risk – meaning, you are less likely to experience a significant cash loss. It is, nonetheless, still possible.
Most schemes have online platforms, so you can easily check out how your investments are performing. Again, seek financial advice if you are unsure of their competitiveness. It may be worthwhile trying to delay your retirement a couple years until an economic upturn.
So, you’re already taking out of your defined-contribution pension. The best course of action is to try and avoid taking out any more than is necessary. Some of your fund values may improve in the next few months. So, the more you leave invested, the more money you will have if stocks recover.
If you can, try instead to use cash savings or other assets that have not been affected for the time-being.
When it comes to maximising your finances, good organisation is fundamental. Consider purchasing a quality financial app that can help you improve your pension and savings.
The Wagebox budgeting app is particularly handy in this case. It provides you with a live view of your pension, all your bank accounts and savings in one place. This way, you know exactly what money you have available, and can budget and save accordingly.