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19 Jul 2021

Coronavirus: how to protect your pensions and investments

Stock markets around the globe have risen over the past week

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?

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

Find out more: Keep up to date on our latest coronavirus news and advice

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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 some change in the value of your pot thanks to the ongoing issues the pandemic is causing across the world.

All of the stock markets we analysed have risen over the past week, meaning investments have generally gained value.

The FTSE 100 - which measures the performance of the biggest companies in the UK - rested at 7,122 points as at 1pm this afternoon (9 August), a rise of 0.2% over a week. The FTSE 250 saw a slightly bigger rise of 0.9% over the same period.

Meanwhile, the US Dow Jones Industrial Average has risen by 1.7%, and the Eurostoxx 50, which represents the 50 largest firms in the Eurozone, has increased by 1.5%.

Market volatility

Markets have been extremely volatile since the first lockdown last March, as investors have been weighing the effect of coronavirus against measures aimed at easing its economic impact.

However, we've generally seen less volatility in recent months.

For example, in January, there was a 7% difference between the FTSE 100's highest and lowest point. In April, this reduced to 4%, in June there was a 3% difference, and in July there was a 3.5% difference.

The graph below shows the market data for four global indices since March 2020.

Fund suspensions

Dealing was suspended last year for 13 open-ended property funds in total, holding a combined £15bn of property assets, as the pandemic meant surveyors couldn't be sure about property prices.

Many dealing suspensions have now been lifted, with most reopening their doors in the last four months of 2020.

However, Aviva and Aegon have closed their property funds for good, and investors must wait for up to two years to get their money back.

The table below shows which property funds are now open, and which are closed.

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.

If you're invested in suspended 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.

Additional protections could be introduced soon, which would mean investors in open-ended property funds could have to wait 180 days before redeeming their investments.

When will markets recover?

According to analysis by investment firm Schroders in December 2020, investors may have to prepare for a drawn-out recovery, potentially lasting until the end of 2021, or even later.

The analysis suggests that it's taken an average of 750 days for the stock markets to recover from a fall greater than 30%; The FTSE 100 crashed by more than 34% in the first three months of last year.

This means investors could be waiting until 2022 before their savings regain their pre-pandemic value.

After the last financial crisis in 2008, it took the FTSE All Share 24 months to recover losses, according to Morningstar data.

What actions are firms and regulators taking?

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

Financial Conduct Authority

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

For instance, in August 2020 it told investment platforms to return cash to investors who had 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.

The FCA 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 BoE to cut interest rates more than once.

The Bank cut the rate from 0.75% to 0.25% on 11 March 2020, 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 Bank voted to keep the base rate at 0.1% again in June 2021. It had been considering moving to a negative base rate for the first time ever, but the prospect of this is looking much less likely.

In May, it said it expects the UK economy to grow by 7.5%, up from the bank's previous forecast of 5%, due to optimism over increased consumer spending.

Prudential Regulation Authority

The Prudential Regulation Authority (PRA) 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 2020 that they wouldn't be returning any dividends to shareholders or buying back their own shares until the end of 2020.

The banks also said that they would cancel all outstanding dividend payments from 2019.

In December, the PRA told banks they're strong enough to restart dividend payments, noting that banks will have to show they will still have enough firepower to absorb losses from bad loans. Should they have had a difficult year, they may decide not to pay a dividend, the PRA added.

Firms scrapping dividends

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 with 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.

The latest dividend data for this year shows that in the first quarter of 2021 (1 January to 31 March) UK dividends fell by the slowest rate since the start of the pandemic; payouts fell by 26.7% year-on-year on an underlying basis to £12.7bn, according to the Link Group Dividend monitor. Total dividend cuts reached £5.8bn in the period.

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 the pandemic.

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 is likely to be invested in 'safer' places such as bonds, which are low risk and usually offer a fixed rate of return.

This is how your pensions are typically invested.

Should you stop paying into a pension?

It's really important to continue contributing to your pension, if you can. The more you invest, the more you'll benefit if stock markets recover.

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.

For example, according to new Which? research, couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown - or just over £265,000 through a joint-life annuity.

Read our full analysis to find out how much single people and couples need for a happy retirement.

Should you unlock your pension?

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 increased by £20 per week last year, temporarily. The uplift will remain in place until 30 September 2021.

If you get working tax credit, you'll be able to get a £500 one-off payment to help you through the ongoing coronavirus crisis.

Before coming to a decision, it's wise to consider all your options. You can get free guidance on the government's Pension Wise website.

How 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 your whole retirement.

One approach is to take a 'natural income' from your investments. This involves buying assets that pay an income, such as shares, which pay dividends, and corporate bonds, which pay interest. In theory, this approach means you can take an income from your portfolio, leaving your capital invested in the hope it maintains its value or grows over time.

You should also consider how withdrawing affects the income tax you'll pay. You're allowed to withdraw 25% of your pension pot free of tax, and the rest is taxed as income when it's withdrawn at your 'highest marginal rate' at that time.

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 out smaller amounts 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 £137.65 per week (the full basic state pension), you would get a 10.4% increase on this after 52 weeks, so you'll get £151.90 a week instead.

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:

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.

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.

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? news and 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 with all our coronavirus news and advice.

This story was originally published on 4 March 2020 and is being updated regularly. The last update was on 9 August 2021.