Worried what the pandemic means for your pension? Here’s why it’s best to think carefully before making knee-jerk decisions, says Vicky Shaw.
With many households dealing with salary cuts, and recent market volatility, some may be wondering if pension saving is worth it at all, as they focus on making ends meet in the here and now.
Although budgets are under strain at the moment, it’s important to remember you’re playing the long game with pension saving.
If you’re not approaching retirement, this means you’re building a nest egg for a time when, hopefully, the current disruption will have passed.
Julian Mund, chief executive of the Pensions and Lifetime Savings Association (PLSA), says: “Market volatility and uncertainty over employment may prompt you to look at your short and long-term household finances.
“In the majority of cases, the best action is to stay the course with your workplace pension,” he adds. “Past experience suggest that share and other asset prices will recover over time.”
PLSA has produced a pensions guide which you can find online (plsa.co.uk/Policy-and-Research-Document-library-Covid-19-Top-tips-for-Savers), along with this advice…
Defined benefit (DB) pensions, such as final salary schemes
A DB pension scheme bases payouts on how many years you have worked for your employer, the salary you’ve earned and the age you retire. More than 28 million people in the UK have this type of pension. You may be particularly likely to have one if you have worked for a large employer or in the public sector.
The retirement benefits for people with this type of pension are not directly affected by stock market movements – whether the volatility is due to coronavirus or something else. Employers are responsible for making sure there’s enough money when you retire to pay your pension income.
The Pension Protection Fund has a duty to protect people with a DB pension in cases where an employer becomes insolvent.
Defined contribution (DC) workplace pensions
Meanwhile, around 17-and-a-half million people have a defined contribution (DC) workplace pension. With this type of pension, savings are built up through a combination of your own and your employer’s contributions, contributions and the returns on investments made by the scheme that manages your savings. The Government also contributes through tax relief.
You might be considering opting out of your workplace pension. But think very carefully about how this will impact your income in retirement. Opting out means you will no longer receive the benefit of contributions from your employer.
You may be worried about recent falls in the value of the stock market and wonder how it impacts your pot. But bear in mind too that financial markets have recovered from shocks in the past.
It’s worth noting that the contributions you and your employer make to your pension now may buy a greater number of shares at a cheaper price. And professional investors managing your workplace pension pot may have already acted to position your investments, so they’ll be ready to benefit from an eventual recovery.
Also, remember DC pension savings benefit from a range of protections if companies looking after them get into trouble.
Thirdly, there’s the state pension, which is paid by the Government. The amount of state pension you will receive is based on the number of years you work or undertake specific caring activities such as bringing up children.
A few more things…
Also remember that if you are considering giving up pension saving, your family could miss out on valuable death benefits which are tied to your scheme. With pensions, like with wills, it’s also worth checking that your nominated beneficiaries have been updated to reflect your family circumstances and your wishes.
On another note, for people in a defined contribution scheme who are close to retirement, it may be necessary to take stock of when you plan to retire and how much income you can expect to have. Consider getting free Government advice from the Pensions Advisory Service or Pension Wise.
Mund says: “Seek guidance or financial advice if you are unsure what to do.”
Finally, be wary of criminals who may try to scam you out of your pension. Be particularly careful of cold calls asking for your pension information or offering you unusually high investment returns or urging you to act by a short deadline. If you suspect something is a scam, report it to Action Fraud.
WHAT… OTHER OPTIONS ARE THERE APART FROM TRADITIONAL PENSION SAVINGS?
While pensions tend to be a central part of people’s retirement plans, there are other ways to save or release cash. Moneyfacts.co.uk has looked at what else is out there, which may help savers diversify their retirement savings in the years to come.
Some options may have pitfalls though, so it’s important to take time and possibly seek financial advice to decide what’s right for your circumstances.
Rachel Springall, a finance expert at Moneyfacts.co.uk, says that, to supplement their pension savings, some people may perhaps wish to open a savings account. “However, if they are a home owner who is soon to retire and are facing a retirement shortfall, then equity release may be worth careful consideration,” she adds.
Here are some potential options outlined by Springall…
Lifetime Isas, also known as Lisas
Lifetime Isas help savers build a nest egg for their first home or retirement. Savers can put in £4,000 each year until they turn 50 and the Government adds a 25% bonus. A Lisa can be opened by savers aged between 18 and 39. The downside is there is usually a penalty to access funds for any reason other than buying a first home or retirement.
This has been temporarily lowered due to the coronavirus pandemic, so that savers should generally get back all the money they originally put in, subject to any investment losses incurred by those who have their Lifetime Isas invested in stocks and shares. The withdrawal charge will go back up to usual levels in from April 6 2021.
Easy access accounts
Opening an account can be quick and paying in a bit in each month can help boost a retirement fund. Saving just £100 a month for the next 25 years could build a pot of £30,000, excluding interest.
Savers may choose a notice account if they are looking for a higher return than can be achieved on an easy access account. So long as savers give the required notice period, they can access their cash without penalty.
Challenger banks tend to reign supreme in the top rate tables in this sector.
Fixed rate bonds
Unlike easy access and notice accounts that allow savers to put in regular sums and gain access to their funds in the short-term, fixed rate bonds tend to be more restrictive. But savers will often be rewarded with a higher rate of interest.
Cash Isas come in many forms, including easy access Isas, notice Isas and fixed Isas.
Those about to retire who face a pension shortfall may be considering a lifetime mortgage to release equity from their home. These should be investigated carefully as while they can provide funds, unlocking wealth from the home has consequences for inheritance planning. Seeking independent financial advice will help you decide if this is right for you.
Financial fact: The choice of savings deals on the market has been dwindling, according to Moneyfacts.co.uk.
In May, it found that 220 deals have vanished since the start of March. Their research in May found there were 1,548 savings account options on the market, including Isas. In March there were 1,768 deals available.
BIKE THEFTS JUMP BY 46% DURING LOCKDOWN
Cyclists are being warned to watch out for thieves by Admiral home insurance, which has reported a 46% spike in claims relating to stolen bikes during lockdown. The figures relate to the seven-week period from March 23, compared with the same period in 2019.
As more people buy bikes during lockdown to keep active or to avoid using public transport, Admiral is urging cyclists to make sure they are being kept securely – as thieves may see them as an easy target.
AVERAGE RENTAL PROPERTY TOOK 29 DAYS TO LET IN APRIL
The average rental property took nearly a month to let to tenants in April, the longest period in at least seven years, according to an index.
Across Britain, it took 29 days on average to let a rental home in April 2020, five days longer than the typical period a year earlier and the longest time to rent since records started in April 2013, Hamptons International found. When the index started, the average time to let was just 18 days.
INSURANCE CUSTOMERS MAY BE ABLE TO GET SOME MONEY BACK
Insurance customers who are struggling financially because of coronavirus can request temporary payment holidays – and some may also be able to move on to a cheaper deal or get a partial refund. The Financial Conduct Authority (FCA) confirmed a package of temporary help for customers, which came into force on May 18 and will be reviewed in the next three months.
It said customers’ risk profiles may have changed because of coronavirus and there may be scope to offer customers materially lower premiums. The FCA said firms should consider whether there are other products they can offer which would better meet a customer’s needs and revise the cover accordingly.