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Coronavirus: how to protect your pensions and investments

FTSE 100 has been rising since the vaccine rollout and Brexit trade deal

Coronavirus: how to protect your pensions and investments

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 – has surged by 6.4% since last Friday (31 December), resting at 6,634 points as of 9 am today (8 January). 

The FTSE 100 has generally been surging on news of a Brexit deal since one was agreed on 24 December. It rested at 6,502 points at close of play, similar to pre-lockdown levels at the end of February, and into the first week of March. 

Positive vaccine news has also boosted investor confidence over recent weeks; the Pfizer-BioNTech and Oxford-AstraZeneca vaccines are now being rolled out.

The FTSE 100 could rise further today, as a stimulus package from president elect Joe Biden to boost the US economy through the COVID-19 crisis is expected. 

However, the whole of the UK is under the toughest current level of coronavirus restrictions, as cases have exceeded 50,000 per day for over a week. The effects of the lockdown could weigh markets down in the coming weeks.

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. 

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, November saw a 14% difference between the FTSE 100’s highest and lowest point.

Volatility calmed a bit in December, with just a 3.4% difference between the index’s highest and lowest point, although this shows how figures can change so quickly.

Market volatility is likely to continue in 2021.

Laith Khalaf, financial analyst at AJ Bell says: ‘A vaccine provides some much needed hope for the economy in 2021. 

‘But in the topsy turvy world of ultra-stimulative monetary and fiscal policy, good news can sometimes be bad news, because economic progress is offset by expectations that the props currently holding up the economy will gradually be kicked away.’

Fund suspensions

Dealing was suspended this year for 13 open-ended property funds in total, holding a combined £15bn of property assets. 

However, some dealing suspensions have now been lifted.

The UK’s largest property fund – the £2.9bn L&G UK Property Fund, reopened on 13 October.

Columbia Threadneedle’s UK Property Authorised Investment fund and its Feeder fund, which hold £1bn collectively, and St James’s Place’s £6bn UK Commercial Property Fund have also reopened.

The £1.6bn Standard Life Investments UK Real Estate and £0.9bn Aberdeen UK Property funds reopened on 16 November.

The following funds are still suspended:

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. The 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.

If you’re invested in suspended 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.

Additional protections in property funds should be introduced soon.

Investors in open-ended property funds could now have to wait for up to six months to sell down their investments, under proposals from the Financial Conduct Authority (FCA) intended to tackle a ‘liquidity mismatch’ in the sector.  

The FCA wants to reduce the potential harm to investors in open-ended property funds, by requiring them to give notice – potentially up to 180 days – before their investments can be redeemed. 

The aim is to avoid mass cash withdrawals, which can lead to widespread fund suspensions such as those seen during the coronavirus crisis.

When will markets recover?

Markets had started to recover when lockdown restrictions began to ease in June 2020, which saw highs of nearly 6,500 points for the FTSE 100.

The index had fallen to levels below 6,000 points over recent months due to uncertainty over a second wave of coronavirus, and the effects and its effect on the economy. 

However, vaccine news has spurred gains in recent months with some optimism that it can trigger faster economic revival. 

The Governor of the Bank of England (BoE) Andrew Bailey said last November, that a vaccine should help shorten the period of disruption from the virus and the lockdowns, and so reduce the long-term harm, or ‘scarring’, caused to the economy.

The NHS has begun the biggest mass vaccination campaign in its history in December, with the The Pfizer-BioNTech vaccine finally being rolled out across the country for the most vulnerable groups of people. 

Meanwhile, 530,000 doses of the Oxford-AstraZeneca are now ready for use. 

It’s hoped that the UK population will be vaccinated before the year 2021 ends. 

The latest ONS data published in December 2020, showed the UK economy grew by just 0.4% in October as the recovery from the coronavirus crisis slowed even before latest lockdown measures.

GDP expanded for the sixth month in a row but was 7.9% below its February pre-pandemic level.

Meanwhile, separate ONS data, also published in December 2020 showed the UK unemployment rate rose to 4.9% in the three months to October, with 370,000 people made redundant.

This was the largest annual fall in employment for a decade, with the number of people in paid work 280,000 lower than a year earlier at 32.5 million, taking the employment rate to 75.2%. 

The government is taking steps to protect the economy. The Chancellor’s announcement to extend the furlough scheme to April 2021 and a further £150bn injection by the BoE in October, both aimed at reducing economic pressure, may boost investor confidence.

Meanwhile, on 25 November Sunak delivered a ‘Spending Review’ which outlined plans for additional income and job protection measures, including help for lower-paid workers and public sector staff.

On 5 January the Chancellor announced a £4.6bn package of support for businesses impacted by the latest lockdown restrictions.

Brexit impact on the economy

A Brexit deal was finally agreed on Christmas Eve, over four years after the UK voted to leave the European Union. 

Some short-term volatility in markets could be expected as the deal is shifted over various parliamentary hurdles.

It’s harder to predict how Brexit will impact the stock market in the long-term, for how long and by how much. 

Finance is a critical UK exporter and a major recipient of foreign direct investment. 

The trade deal doesn’t include provisions for UK financial firms to do business in the EU, beyond limited ‘equivalence’ rules that can be withdrawn at short notice. 

It’s possible such provisions could be added at a later stage, but if UK financial firms can’t do business in the EU this could have serious negative effects on the overall UK economy.

Find out more: Brexit deal: 13 things you need to know  

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 FCA has taken some steps to help consumers through the pandemic.

For instance, in August it told investment platforms to return some of people’s cash in their portfolios who pulled money out of their stocks and shares Isas during the pandemic, in order to protect investors from paying too much in fees and losing out if a firm fails.

It says it expects companies to contact clients and consider returning cash if it would be better suited to a bank or savings account. 

At the start of the pandemic, the watchdog also wrote to all UK-listed firms on 22 March to ban them from publishing their annual results for at least two weeks.

The aim was 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.

The watchdog now has a dedicated coronavirus support hub on its website, which will tell you about how various consumer organisations can help you, plus general financial guidance.

Bank of England

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

The BoE 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.

The BoE voted to keep the base rate at 0.1% again in December, but the continuing coronavirus pandemic makes the outlook for the economy very uncertain. The BoE has been considering taking the UK into negative interest rate territory for the first time ever. 

In October, the Bank sent letters to the CEOs of several financial firms to ask how their company would cope if it were to reduce the base rate to 0% or to introduce a negative rate.

Prudential Regulation Authority

The Prudential Regulation Authority (PRA) also requested banks suspend dividends and share buybacks until the end of 2020, and to 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 gave the banks an additional financial cushion worth nearly £8bn in total, as they were pushed to increase lending to businesses and households during the coronavirus lockdown. 

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?

Other UK listed firms have also been scrapping dividend payments. 

New analysis from investment firm GraniteShares shows that between 1 January and 23 November 2020, 493 companies listed on the London stock exchange had cancelled, cut, or suspended dividend payments. 

This represents a 10.8% increase compared to the period 1 January to 24 July 2020, it said.

Wide-ranging segments of the market have been hit, 51 FTSE 100 companies, 115 FTSE 250 companies, and 149 AIM-listed companies have cut, suspended or cancelled dividends in 2020.

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.’

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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.

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.’

Paying into your pension

It’s also really important to continue contributing to your pension, if you can. 

Canada Life research shows nearly a quarter of workers have stopped paying into their pension or actively considering it because of coronavirus. 

The most common reason given for opting out was needing money for essential spending, but many people cited redundancy or being furloughed.

You can opt out of your pension, but before you make any decisions, it’s worth doing some pension planning to see what kind of retirement you wish to have and only opt out if you really can’t afford to keep paying in. 

According to Which? analysis, to have a comfortable retirement you’ll need £169,175 in your pension pot if you’re a couple or £456,500 if you want a more luxurious lifestyle.  

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 tax-free 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.

Mr 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 in six people over the age 50 and in work thinks that they will delay retirement by an average of three years because of the pandemic.

Some 15% aged over 50 and in work believe that 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 the age of 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 until April 2020.

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 defined contribution 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 pandemic 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 8 January.


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