By Jenny Little
Covid-19 has turned the world upside down, sending Britain into its worst recession since records began. People may worry about what this means for their pension pot, wonder whether they can afford to save, or even consider raiding their retirement fund. What is the reality for pensions in a recession and how can you secure your future in uncertain times?
Seamus Walsh, a pension guidance expert for Aviva, says that many people were spooked by the impact of the virus on stocks and shares earlier last year: “When big drops occurred in the markets back in March, some customers asked to switch funds. But ... things have been tracking upwards since.”
Any panic may well be misguided as pensions are meant to be long-term investments that ride the highs and lows of stock markets. After the last financial crisis, pension funds recovered their losses when equities rebounded. This time round, while stock markets have been volatile since Covid-19 struck, news of potential vaccines has helped them, and pension funds, to recover lost ground.
“Pensions investments are for the long term,” says Walsh. “The longer your money is invested, the longer it has to recover from any dips.”
- Almost six out of 10 people (58%) aged between 45 and 60 are concerned that they do not have enough money to enjoy a decent standard of living in retirement, Aviva research shows.
Where is your money?
“People should know where their money is invested and be comfortable with the balance of their portfolio,” Walsh says. “Your pension provider can discuss your options. If you’re prepared to pay for advice, seek out a financial adviser.”
While equities have had a volatile year, fluctuations should even out over time. Cautious investors may opt for a more balanced portfolio, with some money invested in cash or government bonds, which are regarded as a safe haven. Age is another factor — those nearing retirement may move more money into bonds as they will need to access their cash soon, while younger savers have more time to make up short-term losses.
- Two out of three people between 35 and 44 are worried about their retirement finances, the Aviva survey found.
Choose the right pension
Many people struggle to understand pensions but given their importance, it’s worth spending time getting your head around the details. Final salary, also known as “defined benefit”, pensions are the gold standard, but many employers have moved away from providing such generous schemes that give a guaranteed retirement income. More common are defined contribution schemes where employees build up individual pension pots through their contributions and those of their employer. They know what they are putting in, but the payout is less certain, as it depends on the performance of the markets and your pension provider in managing your fund.
Under automatic enrolment, a government initiative to increase the number of people saving for retirement, employees are automatically signed up for the pension their employer offers. As long as you don’t opt out, you will make contributions alongside your employer, and receive tax relief on the money you pay in.
Alistair McQueen, Aviva’s head of savings and retirement, says: “For employed individuals, any money they pay in is boosted by their employer under automatic enrolment. They can’t access money until they are 55, but they do get money from their employer they wouldn’t otherwise receive.”
Things are a bit different for people who are self-employed. They can pay into a personal pension set up with a provider of their choice or choose a self-invested personal pension (Sipp), which gives investors control over how money is invested. “Self-employed people should be aware of the boost a pension gives in tax relief,” says McQueen.
An important source of income for most pensioners remains the state pension. For people who are uncertain how much they will receive and when, the government has an online calculator to give an accurate forecast, and help people plan ahead.
- One in four self-employed people have not taken steps to prepare for retirement, Aviva findings reveal.
Resist cashing in — or stopping payments
Figures from HM Revenue & Customs show a 6% increase in the number of people withdrawing cash from their pensions in the third quarter of 2020, compared with the same period in 2019. Experts warn that taking too much too early could leave people with less money in old age or mean that they have to put off retirement.
McQueen adds: “From 55, you can access your pension, but there are implications for your retirement finances, plus tax issues if you take out a lump sum. Also, the amount you can save into a pension later may be affected. Seek help. You could turn to Pension Wise, the Money Advice Service, the Pensions Advisory Service, Citizens Advice or your pensions providers’ support services.”
Some people may feel they cannot afford pension payments if they are unemployed, furloughed or have seen earnings slump, but it is wise not to stop payments if you possibly can as this is likely to mean you have less to retire on. McQueen says: “Pension products are very flexible, allowing you to stop, start, increase and decrease contributions. Talk to your provider to make adjustments. Before you act, check a pensions calculator online to assess the long-term implications.”
Why pension saving is usually a good idea
Experts insist there is no bad time to start a pension. And be reassured savings are protected by the Pensions Protection Fund. McQueen says: “All pensions are heavily regulated by government regulators. Individuals also have recourse to the Pensions Ombudsman if they feel mistreated.”
The message remains that the earlier you start, the more you benefit. McQueen says: “The rules of thumb are – start paying in 40 years before you want to retire. Pay at least 12% of your salary including the contribution of your employer. And aim to create a pension fund worth about 10 times your salary. The sooner you start, the better. Then, ride the waves of the economy and enjoy the retirement you’ve always wanted.”
Find out how to harness your money superpower with tips, tricks, and information on managing money in today’s ever-changing world. Read more here.
The views expressed in this article do not constitute financial advice. The value of investments may go down as well as up and you may not get back the amount you invested.
This article was originally published on theguardian.com as part of the Aviva and Guardian Labs 'Be a money hero' campaign.