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Coronavirus: how to protect your pensions and investments amid stock market panic

The FTSE 100 index has posted its biggest quarterly fall since 1987

Coronavirus: how to protect your pensions and investments amid stock market panic

The coronavirus outbreak is piling pressure on financial markets around the globe. But how is it affecting the health of your personal investments and how can you keep them safe?

The FTSE 100 – which measures the performance of the biggest companies in the UK – stood 0.5% (5,480 points) higher when markets closed yesterday (2 April) than it did the previous day.

The FTSE 100 has been steadily falling this week and is down 1.5% from when markets closed on Monday.

However, the blue-chip index posted its largest quarterly fall (1 January to 31 March) for more than three decades earlier this week, with the last being on Black Monday in 1987 when there was a sudden, severe, and largely unexpected stock market crash.

At the start of January, the FTSE 100 index stood at around 7,604 points, meaning there has been a drop of around a third since then.

The FTSE 100 has fallen faster than after the global financial crisis more than a decade ago and much faster than after previous shocks. Widespread reporting suggests a global recession could be on the cards.

Here, Which? takes a look at how the continued pandemic panic could affect your pensions and investments and suggests ways you can protect your portfolio.

Find the answers to your questions by clicking the links below:

How is coronavirus affecting investments?

If you’re an investor, you’ll probably have some money in the stock market and it’s likely you’ll have seen a fall in the value of your pot.

Tom Selby, AJ Bell senior analyst, says: ‘Very few companies have escaped the [stock market] falls, so this will have affected the vast majority of people who hold stock market investments via their pension or Isa.’

For instance, Primark owner Associated British Foods – which is listed in the FTSE 100 – has seen a slump of almost a fifth since the start of March.

The company announced over the weekend that all UK Primark stores will be closed ‘until further notice’ due to reduced demand as people continue to practise social distancing.

Meanwhile, the travel industry has been hit particularly hard due to suspended travel.

For example, budget airline easyJet has suffered significant losses, with shares plunging by more than half since the start of March.

Market volatility

The markets will be extremely volatile as investors weigh the effect of coronavirus against measures aimed at easing its economic impact. 

Therefore, it’s hard to say how badly it will hit your investments in the short term.

For example, the index enjoyed four consecutive days of gains last week, increasing by 16% from Monday to Thursday. However, it decreased by 5% from when markets closed Thursday to the end of the day on Friday.

Single-day volatility has also been common.

For example, the FTSE 100 saw a high of 5,552 points and a low of 5,395 throughout the day yesterday.

Expect choppy markets as investors and firms react to the ongoing pandemic.

Emma Wall, Hargreaves Lansdown head of investment analysis, says: ‘If the markets follow the pattern established over the past month, sudden market drops have been followed by similarly acute intra-day upswings as the market absorbs the news and recalibrates its outlook.

‘Looking ahead to the coming weeks, investors should expect the only certainty to be volatility.’

Separately, she told Which? Money on 16 March: ‘We are expecting the coming weeks to be similar to the last – volatility is going nowhere and there will be losses on equities across the globe.’

Fund suspensions

The coronavirus pandemic has also seen 14 major UK property fund suspensions take place so far, with a total of £15.8bn trapped in various funds. 

Many people choose to invest in such funds, where a professional manager collects money, then invests it directly in property or in property shares.

Action in times of uncertainty such as this is crucial; Financial Conduct Authority (FCA) rules require property fund managers to consider suspending funds during extreme market conditions.

Reports suggest managers want to protect customers by ensuring that they don’t make payments at a time when they’re unsure of the value of their underlying assets.

The table below shows which property funds have been suspended and how much they’re worth. 

Ryan Hughes, AJ Bell head of active portfolios, says:While this will be hugely disconcerting for investors who are trapped in these funds, it’s important to remember the underlying reasons for asset managers making this move.

‘Fund suspensions are a tool in the armoury to protect investors and as the world looks for ways to tackle the virus, this is one necessary step to ensure that financial markets do not become totally disorderly.’ 

If you’re invested in such funds, there’s not a whole lot you can do apart from sitting tight and look for information and updates on your fund provider’s website.

How are regulators reacting to the COVID-19 pandemic?

UK regulators have intervened in different ways to protect the economy and it’s hoped this will also protect people’s investments. 

The Financial Conduct Authority

The Financial Conduct Authority (FCA) wrote to all UK listed firms on 22 March to ban them from publishing their annual results for at least two weeks.

The aim is to prevent investors from acting on out-of-date information, but on the other hand, it also means that markets can’t be informed of the financial position of firms. 

Russ Mould, AJ Bell investment director, says: ‘Delaying publication of financial results starves investors of information at a time when they will naturally be very worried about their investments.’

Reports suggest this has prompted speculation that the delays will lead to a temporary market shutdown, which could have a negative impact on your investments. 

Mr Mould explains: ‘If markets were to close, people may still receive dividends and [will be able to] withdraw cash from their accounts, but they would not be able to sell (or buy) shares at precisely the time they might need access to their investments if other sources of income have been hit by the crisis.’

Bank of England

The economic fallout has also forced the Bank of England to cut interest rates more than once.

The Bank cut the rate from 0.75% to 0.25% on 11 March, then just eight days later on 19 March reduced it further to 0.1%. 

Theoretically, lower interest rates should mean at least some good news for stock markets.

This is because the rates at which companies can borrow money from banks will also be lower.

Lower costs mean there’s more chance for them to make a profit, which in turn may lead to share prices increasing.

However, in this case it hasn’t worked as investors continue to be spooked by the uncertainty of coronavirus.

Renewed coronavirus fears saw the FTSE 100 close down 83 points, or 1.4%, at a then four-year low at 5,876 points on the day the Bank announced its decision.

The next decision on the base rate is scheduled for 26 March and experts are predicting another cut could be on the way.

Prudential Regulation Authority

The Prudential Regulation Authority (PRA) also requested banks suspend dividends and share buybacks until the end of 2020, and cancel any outstanding payments. 

In response, lenders including HSBC, RBS, Standard Chartered, Barclays, Lloyds, and NatWest said on 31 March that they will not be returning any dividends to shareholders, or buying back their own shares until the end of 2020.

The banks will also cancel all outstanding dividend payments from last year amid recession fears. 

This will give the banks an additional financial cushion worth nearly £8bn in total, as they are pushed to increase lending to businesses and households during the coronavirus lockdown. 

The PRA said it ‘welcomes’ the decision and that banks have ‘enough capital to weather severe recessions in both the UK and globally, as markets brace for a potentially huge downturn’. 

It noted the extra ‘headroom’ by scrapping dividends will allow them to ‘support the economy this year’. 

The regulator also said it expected banks not to pay any cash bonuses to their top members of staff.

Should I be concerned about my savings in the long term?

The short answer is no.

While the coronavirus will likely continue to rattle markets, this doesn’t necessarily mean long-term investors should be overly concerned.

This is because volatility in the stock markets is normal and markets often rebound quickly once immediate issues are resolved.

Jonathan Raymond, Quilter Cheviot investment director, says: ‘The world always carries uncertainty and there is enough of it about.

‘The trouble is that [stock] markets generally trend upwards over the longer term, even though it’s not unusual for them to fall by 10% over a short time.

‘The FTSE 100, for example, has regularly fallen by 10% since 1990, although it’s relatively rare for it to fall by more than 20%.’

Tom Selby says that at times like this ‘it’s important for investors not to panic’.

He adds: ‘Anyone investing in the stock market should be thinking in terms of five years or more, rather than weeks or months, and that is the context through which to view the current turbulence.’

Furthermore, Chancellor Rishi Sunak announced a series of measures to protect the economy amid the coronavirus outbreak in the Budget on 11 March.

He then went on to announce a further raft of measures, which included paying up to 80% of employed workers’ wages, as well as allowing deferred VAT and payment on account tax bills on 20 March. Six days later he revealed similar measures to protect the self-employed.

But it’s important to bear in mind that it isn’t clear how much of a positive impact this will have. 

Tom McGillycuddy, Tickr founder, says: ‘Unless the UK and US government embark on a big fiscal program, like in some of the Nordic countries, we are in for multiple quarters of retraction.

‘But, with some big fiscal intervention and proper short term hardcore social distancing, we could bounce out of this much quicker.’

Ultimately, the long-term impact of the virus on investments is impossible to predict.

The Which? Money Podcast

How is COVID-19 affecting my pension?

If you have a defined contribution pension – whether private or through work – your savings have probably also been hit quite hard as a consequence of coronavirus.

This is because pension schemes invest in the stock market, too, so big rises and falls will have an impact on how much is in your pot.

But remember that pension savings, such as any investments, are usually a long-term bet. 

If you’re young, you shouldn’t be that concerned as you have lots of time for markets to recover before you take your pension.

If you’re older and close to retirement, your pot could have taken a bigger hit.

However, it’s worth noting that part of your pension will also be invested in ‘safer’ places such as in bonds, which are really low risk and usually offer a fixed rate of return. The older you get, the more schemes tend to choose to invest in such assets to limit risk to your pot.

This is how your pensions are typically invested.

If you’re concerned about the value of your pension, most schemes have online platforms where you can see how your investments are performing, and how much is in your pot.

Steven Cameron, Aegon pensions director, says: ‘The current market turbulence will no doubt be concerning for individuals whose pension savings are invested partly or fully in the stock market. 

‘Those with an adviser should contact them as the first point of call. There is a risk that taking “panic” action might not be in someone’s best longer-term interests.

‘If you’re about to retire and were planning to buy an annuity, you face an additional challenge as the 0.5% cut in bank base rates has meant annuity rates have also fallen.’

Cameron also notes: ‘If you’re already using drawdown, or plan to move into drawdown soon, you might also want to avoid taking out any more than you need to while fund values remain depressed. 

‘The more you can leave invested, the more you will benefit if stock markets recover.’

Delay taking your pension, if you can

One thing you can consider is deferring your private pension. If you’re in a defined contribution scheme, delaying when you claim means that you leave it invested for longer, so you could have a bigger pension pot when you come to retire.

Deferring also means that you can continue to save as much as £40,000 a year into a pension and earn tax relief under current rules.

You can also defer your state pension for extra income. 

Choosing to defer for five weeks or more means that, once you do start claiming your state pension, you’ll receive more than you otherwise would have. 

It can also help you manage your tax liability if you don’t want to be pushed into a higher income bracket. 

For example, if you receive £134.25 per week (the full basic state pension), you would get a 10.4% increase on this after 52 weeks, so you’ll get £148.30 a week instead. 

Find out more: how much do I need to retire?

How you can keep your investments safe

If you’re an investor, you should use the coronavirus outbreak as an excuse to review your portfolio.

It’s crucial to manage the risks you’re exposed to, to avoid suffering agonising losses to your capital.

Here are some things you can do to help protect your savings.

Diversify your portfolio

The key is to build a diverse portfolio with a mix of different investments that suit your attitude to risk.

A balanced investment portfolio will contain a mix of equities (shares in companies), government and corporate bonds (loans to governments/companies), property and cash.

These investments hold different degrees of risk.

Bonds, for instance, are generally a much lower risk because there is greater certainty of returns, which can be fixed (although the returns are generally lower, too).

Whereas equities are riskier because the market is more volatile, but the returns can be much higher than bonds.

However, beware of over-diversification – holding too many assets might be more detrimental to your portfolio than good as you’ll have too much of a small proportion of your money in different investments to see much in the way of positive results.

We’ve created some example portfolios, which illustrate the levels of risk associated with each type of asset.

These portfolios don’t constitute financial advice, but can act as a helpful starting point for a conversation with a financial adviser.

Don’t panic trade

Generally speaking, dumping your investments in a period of uncertainty like this will do more harm than good.

This is because panic selling your investments often locks in losses and you could miss out on any recovery. Jumping back into the market isn’t easy, either.

Selby says: ‘It’s really important to not overtrade.

‘It’s not practical and it would be expensive to switch a big percentage of a portfolio around. If the outbreak is contained quickly you could miss a rally, costing you even more.’

There is a similar opinion among other investment firms.

Rupert Thompson, Kingswood chief investment officer, says: ‘We remain very much of the opinion that unless you have a very short-term horizon or are particularly risk-averse, you should not now sell equities.

‘While a global recession is now possible, we believe it should be a relatively short-lived affair and that economic activity should recover again in the second half of the year. If so, markets should also recapture much of their recent losses later this year.’

Raymond adds: ‘It’s obviously unnerving to see the value of your portfolio suddenly drop. However, if you move to cash you run the risk of selling at exactly the wrong time. Regular corrections are the ‘price’ investors pay for good returns over the long term.’

Can you predict stock market movements?

It’s impossible to fully predict how the market will behave, especially over a short time.

Past performance can be a helpful metric when choosing investments, but it’s no indication of future performance and shouldn’t be the only aspect an investor considers.

There will always be risks associated with investing in the stock market. Beyond the assets themselves, other risks you should be aware of include:

  • Inflation risk The threat of rising prices eroding the buying power of your money
  • Specific risk If you invest in individual companies or shares, there’s always a chance that unforeseen events will scupper your portfolio
  • Currency risk You’ll face this risk if your money is invested in stock markets outside the UK
  • Manager risk Some fund managers may consistently beat their benchmarks, but there’s a huge variation in the investment performance of individual managers.

For help and tips about the world of investing, see our comprehensive guide.

Which? advice on coronavirus

Experts from across Which? have put together the advice you need to stay safe and make sure you’re not left out of pocket.

You can keep up to date on our latest coverage over on our coronavirus advice hub.

This story was originally published on 4 March and is being updated regularly. The last update was on 3 April.

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