The coronavirus pandemic is piling pressure on financial markets around the globe. But how is it affecting the health of your personal investments and pensions, and how can you keep them safe?
The FTSE 100 – which measures the performance of the biggest companies in the UK – stood 4% (6,049 points) higher when markets closed yesterday (18 May) than it did the previous trading day.
The rise came after US pharmaceutical group Moderna said it has had a breakthrough with a potential coronavirus vaccine which could go into the third and final phase of trials by July. This is the first time the FTSE 100 has finished the day above 6,000 points this month, and the second time since early March.
However, this doesn’t necessarily mean the economy will heal, or at least not for quite some time. Last week chancellor Rishi Sunak warned that it’s ‘very likely’ the UK is in a ‘significant recession’, and experts have warned that public borrowing could reach over £300bn in the UK alone.
The economy is contracting at the fastest rate since the financial crisis over a decade ago. According to the Office for National Statistics, it plunged by 2% in the three months to March, following no growth in Q4 2019.
The FTSE 100 index alone has fallen by a fifth since the start of the year so far, from 7,604 points.
Whether or not economies will heal is largely uncertain, and experts have warned of an even bigger slump in the current quarter. The Bank of England (BoE) says the coronavirus pandemic will push the UK economy towards its deepest recession on record. It said the economy was on course to shrink 14% this year, based on the lockdown being relaxed in June.
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. You can navigate this story by clicking the links below:
- How is coronavirus affecting investments?
- How are regulators reacting to the COVID-19 pandemic?
- How are firms reacting to the COVID-19 pandemic?
- Should I be concerned about my savings in the long term?
- How is COVID-19 affecting my pension?
- How you can keep your investments safe
- Can you predict stock market movements?
- Which? advice on coronavirus
Keep up to date on the latest coronavirus news and advice with Which?
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 example, the travel industry has been hit particularly hard due to ongoing suspended travel.
Budget airline easyJet has suffered significant losses, with shares plunging by 50% since the start of March.
- Find out more: what coronavirus means for fixed-term savings accounts
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, on 29 April the FTSE 100 enjoyed its first day above 6,000 points since the start of March. The next day it dropped back down to under 5,000 points and then saw two more consecutive days of losses. However, the index is generally in a more stable position than it was in April; there’s been a 3% difference between its highest and lowest point so far.
Hargreaves Lansdown head of investment analysis Emma Wall says: ‘These rises, are – in-part – down to the support that governments across the world have given.
‘Further positive news comes in the form of various locations relaxing lockdown restrictions.’
She adds: ‘In recent weeks, dozens of companies have announced that dividends and share buybacks will be scrapped, suspended or delayed.
‘This could put pressure on investors who rely on the natural income from stock dividends – particularly those in retirement. It’s still too soon to say with certainty whether the recent increase in values is the beginning of the end, or simply an upswing typical of volatile markets before we drop again.
‘What we can say is that for all investors – whether you’re focused on income or growth, in retirement or decades off drawing a pension – the successful lifting of restrictions will be key in liberating the stock market and the economy.’
Oil impact on the stock market
On 20 April oil prices in the US plunged into negative territory, which spooked leading markets around the world including the UK’s FTSE 100.
Emma Wall comments: ‘The reason this has spooked markets is not just because of the impact on the oil majors listed on the FTSE.
‘It’s the message it sends – the idea that there will be so little demand for oil next month that the oil producers were willing to pay you to take the black stuff off their hands.’
The coronavirus pandemic has also seen 18 major UK property fund suspensions take place so far, with a total of £22.4bn 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 looking for information and updates on your fund provider’s website.
- Find out more: what is an investment fund?
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 acting on out-of-date information, but 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.
It 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 of England announced its decision.
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 also said they would 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.
- Find out more: what risks do investors face?
How are firms reacting to the COVID-19 pandemic?
It seems other UK listed firms have also been scrapping dividend payments.
According to AJ Bell, as at 11 May, 289 dividends have been cut or deferred in the UK, totalling £28.3bn.
AJ Bell personal finance analyst Laura Suter says: ‘Some equity income managers have predicted cuts to payouts from funds hitting 40% or more, with limited options left for income-seekers.
‘The banking giants make up the largest cuts, with over £5bn of dividends cut at HSBC, £1.6bn at Lloyds and just over £1bn at Barclays.
‘Royal Dutch Shell’s near £2bn dividend cut is among the largest and was one of the biggest shocks for investors’ portfolios.’
According to GraniteShares, from 19 March to 20 April alone around 92% of UK listed companies had cancelled or suspended dividend payments.
In total there were around 176 dividend announcements during this period, with 162 companies cancelling or suspending, and just 14 making payments, although some of these were reduced.
The firm says investors will be hit hard by dividends being cancelled or suspended. It adds: ‘Reinvesting them and the benefits of compounding mean they are one of the most powerful tools available for boosting returns over time.’
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 announced 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 governments 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.
- Find out more: what is investment risk?
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.’
How much should I withdraw from my pension?
You’ll need to think carefully about how to protect the longevity of your pension savings so you have enough to last.
Quilter head of retirement policy Jon Greer says: ‘For instance, someone with a £100,000 pot might have set-up withdrawals of around 4%, or £4,000 per annum.
‘But they now face a tough decision. If their pot has fallen in value to £75,000 then £4,000 represents a withdrawal rate of around 5.3% a year, which may not sound a lot but creates considerable uncertainty about how long their pot will last.
‘To mitigate the risk of ruin, they could keep their withdrawal rate fixed at 4% to preserve the longevity of their pot, although this would see the income from their pension drop to £3,000 a year.
‘This is a difficult decision and individuals need to decide whether they are willing to forego some income today in exchange for greater income security in the future.’
The table below shows how a retiree with a portfolio of £100,000, taking annual withdrawals of £5,000, could see their portfolio be 22% worse off if they experienced losses in the first two years of retirement, compared with having the same losses in years four and five.
Greer says: ‘This [the fall in value] is due to a process known as ‘pound-cost ravaging’, where because of declining markets more investment units have to be sold to generate a desired income level, thus depleting the portfolio size during the early years of drawdown.
‘One way to avoid this and allow your pot to recover is to take your income from the dividends and bond payments that your underlying investments will provide.’
He says another option is to ‘utilise other assets in the medium term while markets recover, particularly in something like a cash Isa, to provide a form of compromise which allows individuals to pause or reduce their pension income withdrawals’.
Greer concludes: ‘If you have cash savings or other assets you can afford to live off which haven’t been affected by the stock market fall then this might be the best option.’
You should also consider how withdrawing affects the income tax you’ll pay. You’re allowed to withdraw 25% of your pot free of tax, and the rest is taxed as income when it’s withdrawn at your ‘highest marginal rate’ at that time.
This could mean you pay 20%, 40% or even 45% on such income if you are a UK taxpayer or 21%, 41% or 46% if you are a Scottish taxpayer.
Cameron says: ‘Crucially, if you take out a large amount of your pension in a tax year – or even cash in the whole pot – this could push you into a higher tax bracket, resulting in you paying more tax than you would have if you’d taken smaller amounts out over a longer time period.’
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.
The pension freedoms
Under current rules, you can withdraw your private pension at 55.
If you’re at this age and have lost your job due to coronavirus try not to jump the gun and withdraw your pension if you weren’t previously planning on doing so.
You’re still entitled to government support such as Universal Credit. The Universal Credit standard allowance and working tax credit basic element will both be increased by £1,000 for the next 12 months.
Analysis by Hargreaves Lansdown shows pension savers over the age of 55 have cut back on the amount they’re withdrawing from their pot since the start of the pandemic.
The average withdrawal among its self-invested personal pension (Sipp) users fell by 6% in March compared with a year earlier, while the number of one-off lump sum payments from pensions dropped by 7%.
Cameron says: ‘While DC pensions now offer significant flexibility on what can be taken when, there can be many tax consequences both now and in future.
‘Pensions are designed to provide you with an income throughout your retirement and taking out more money than you need to, or starting sooner, will mean you have less to live off in future.’
‘Before coming to a decision it’s wise to consider all your options and for this we recommend you seek personalised advice from a professional adviser.’
You can also look for guidance on the government’s Pension Wise website.
Find out more: how much do I need to retire?
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).
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.’
- Find out more: how to build an investment portfolio
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.
Experts from across Which? have put together the advice you need to stay safe and make sure you’re not left out of pocket.
- Coronavirus: how you can protect yourself and others
- Coronavirus outbreak: advice for travellers
- Coronavirus: what it means for your travel insurance
- Coronavirus: your rights when an event is delayed or cancelled
- Coronavirus: have you spotted dubious products and surge pricing?
- Coronavirus: your travel and consumers rights Q&A
You can keep up to date with our latest coronavirus news and advice.
This story was originally published on 4 March and is being updated regularly. The last update was on 19 May.