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

The FTSE 100 has fallen by 235 points since Monday

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

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 1.7% lower (6,049 points) when markets closed yesterday (9 July) than it did the previous trading day.

This came despite Chancellor Rishi Sunak’s summer statement on Wednesday, in which he announced a series of measures to help boost the economy. 

The index has slumped every day this week and has fallen by 235 points since Monday.

There are still persistent worries about the global economy. The European Commission said earlier this week that the Eurozone economy will fare worse than initially expected this year. It estimates a contraction of just under 9% in the single currency area this year, down from 7.7% at its last guess.

The FTSE 100  enjoyed highs of almost 6,500 points on hopes of lockdown easements boosting the economy at the start of last month. The past two weeks have been extremely choppy on mounting fears of a second peak and the general economic ramifications of the virus.

It has recently come to light that the UK’s GDP fell faster than first thought in the first three months of the year. Meanwhile, EY Item Club shows the UK economy will shrink by 8% this year and is unlikely to recover from the damage wrought by coronavirus until 2023. 

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:

Keep up to date on the latest coronavirus news and advice with Which?

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

Budget airline EasyJet and Carnival Cruise Line have exited the FTSE 100 after a major collapse in their share prices. 

Adrian Lowcock head of personal at Willis Owen investing  says: ‘Both easyJet and Carnival have been in the eye of the storm, and their relegation looked nailed on weeks ago.’

He adds: ‘Investors need to be aware that it could be some time before they return to the blue-chip index given the outlook for travel remains very uncertain, with any return to pre-crisis levels likely to take years, not months.’

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 instance, so far this month there’s been a 6.5% difference between the FTSE 100’s highest and lowest points.

Joe Healey, The Share Centre investment research analyst, says: ‘It appears investors are yet again pricing in an optimistic outlook as global coronavirus cases continue to fall and restrictions begin to loosen.

‘However, what’s important to remember is this virus is not simply going to go away, as businesses and operations are likely to be fundamentally challenged for some time.

‘On the most part, capacity may be reduced with restrictions and procedures in place to manage social distancing therefore hitting demand, while the biggest question of all is that we don’t know if the consumer will have changed when economies reopen.

‘Rising unemployment and the prospect of a new social environment could materially alter the way the economy runs moving forward, which investors need to have in the back of their minds.’

He adds: ‘On top of this, it’s likely we’re going to face some second waves and the challenge of how the country can effectively deal with these is another factor towards how successful the reopening of economies will be to markets.

‘There are still a lot of questions to be answered and it won’t be a surprise to see some rocky patches ahead.’

Oil impact on the stock market

Oil prices have been dropping amid concerns about slow demand growth. 

BP announced plans this week to cut 10,000 jobs, due to limited demand for oil. 

It said that it’s spending much more than it makes, to the tune of millions of dollars every day.

Plunging oil prices have been an issue across the world’s largest economies.

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.’

Fund suspensions

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 lot you can do apart from sitting tight, and looking for information and updates on your fund provider’s website.

Are markets starting to recover?

Despite a period of uncertainty, it seems financial markets are starting to recover slightly. 

The FTSE 100 has been steadily climbing over the past month. Since 18 May, it has only seen one day below 6,000 points. The index endured six weeks below this figure before then.

The increase is partly down to the easing of lockdown restrictions across the world, which has boosted investor confidence. 

It’s also hoped that the economy will see some signs of recovery following the dramatic easing of lockdown restrictions on 4 July.  From this date, pubs, hairdressers and restaurants opened their doors to the public, meaning most non-essential businesses are now open. Gyms and nightclubs are excluded from this list.

There are also rising hopes for a new coronavirus vaccine, which is being developed by the University of Oxford. This has been tipped as the ‘front runner’ and is currently being tested by 10,000 volunteers. 

Meanwhile, the Bank of England (BoE) announced earlier this month that it will be injecting £100bn into the UK economy to help aid its recovery.

However, the UK economy has some way to go to heal.

Chancellor Rishi Sunak has warned that we’re already in the middle of a ‘significant recession’. This means there’s been a significant decline in economic activity for a prolonged period.

Figures from the Office for National Statistics revealed on 12 June that the UK economy suffered a 20.4% plunge in April, the largest monthly contraction on record. 

It previously said the UK economy plunged by 2% in the three months to March, following no growth in Q4 2019.

Meanwhile, government borrowing has hit a peacetime record; it borrowed £62bn in April – more than had been anticipated for all of 2020. 

It’s expected that the economy is on track to shrink 14% by the end of 2020, making it the deepest recession for more than three centuries. The BoE estimates show the economy only shrank more in the early 1700s, by 15%.

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 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 Barclays, HSBC, Lloyds, Natwest, RBS and Standard Chartered 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.


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, the number of FTSE 100 firms that have paid out rising dividends each year for the past decade has fallen by more than 40% since the start of the year. 

Projected dividend payouts for this year have also fallen by almost a third over that period from £91bn to £62bn, the investment platform said. 

It said the coronavirus pandemic has ‘decimated’ its previous forecasts with many of Britain’s most prominent companies slashing or even cancelling their dividend payments.

Just 14 companies have awarded their shareholders at least 10 consecutive hikes in their annual dividend payments since 2010, compared to 25 at the beginning of the year.

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, 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 co-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.

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.

Although now, according to Hymans Robertson, defined contribution (DC) pensions are starting to show positive signs of market recovery after dramatic falls in the number of expected retirements this year due to the ongoing coronavirus pandemic.

It’s important to 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.’

Mr 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.

Jon Greer, Quilter head of retirement policy, 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.

Mr 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’.

Mr 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’re a UK taxpayer or 21%, 41% or 46% if you’re 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.

A report by Legal & General claims one person in six aged over 50 and in work thinks they will delay retirement by an average of three years because of the pandemic.

Some 15% aged over 50 and in work believe they will delay, while 26% said they will have to keep working on a full or part-time basis indefinitely. The survey also found 10% could delay their plans by five years or more.

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%.

Mr 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?

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).

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.

Mr 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.’

Mr 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 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 10 July.

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