What does Coronavirus mean for my pension?

Coronavirus hit the financial markets in a big way during March. As a result, many pension savers will have seen a drop in the value of their savings over the last few weeks. So should you take action?

Read our five-point guide to find out what it all means for your retirement fund, and why sitting tight is probably your best course of action. And if you’re interested in investments more generally in a Coronavirus world, read on here and here.

1. Don’t panic – but do get the facts

News from the financial markets may have got your attention in recent weeks.  It seems that for the short term, emotion is driving the markets, not cold-blooded calculation.

Ignore the noise.

It’s harder than ever to think of the long term when present-day life has been turned upside-down so quickly.  But what you really need to know hasn’t changed from a month ago: where are your pensions, how are they invested, how much do they cost, and when do you intend to draw on them?

Once you gather these facts, you can start to draw some conclusions on what this means for your pension.

2. Remember that pensions are the ultimate long-term investment

Most people pay into their pensions for more than thirty years, and may live off them for more than thirty in retirement.  It’s a long-term game.

So it’s unwise to let a few weeks of bad news drive investment decisions that may span decades.

And although there are no guarantees, history shows us that investment values generally go up over the longer term, even with short term volatility such as we’re seeing now.

Making decisions based on what’s happening in the short term can be seriously bad for your finances.

You might be tempted to move your investments into cash for a while.  But by doing so, you risk missing out on the uptick in value when it comes.

For example, Tuesday 24 to Thursday 26 March saw the biggest three-day rise in the S&P 500 list of top US companies since the 1930s!

Volatility can mean recovery as well as decline – so you need your money to be in the market when it happens to grow your funds.

3. Should you buy the dip?

Investor commentary has turned to whether now is the right time to add money to your pensions and investments.  (We’ve covered this here).  But for the prudent pension saver, there are two points to remember about the Coronavirus market dip.

Firstly, while you’ll never be able to pinpoint the very bottom of the market, valuations are a lot cheaper than they have been for some time.

So if you’re planning to put money into your pension over the short-to-medium term, now is the time to get your money ready, understand your tax position, and develop an investment plan (we can help).

Secondly, there’s little doubt that the current volatility will continue for the coming days and weeks.  So don’t bet the farm on a single day in the markets.

Make sure you can drip in your money over at least a handful of different days.  This will smooth out the price at which you invest, and mitigate your downside risk, while still giving your pension money decent scope for growth.

4. Approaching retirement? You may need to take action

One group of pension savers who should consider the need to do something is those approaching retirement over the next 3-5 years.

This group has less time than most pension savers for their investments to recover before they need to draw on them.

This is an area where one-to-one advice is vital, because everyone’s situation is different (again, we can help).  To begin with, there are three considerations.

Firstly, it’s important to get clear on how your pension is invested.

Many pension savers put their money into ‘life-styling’ investment plans.  These plans automatically switch your pension into less volatile (and generally lower-growth) assets, like cash and government bonds, as you approach your planned retirement.

If you’re in this group, your pension fund will have been cushioned from the worst of the recent market slide.

Secondly, now is the time to think about how you plan to draw your pension fund.

Has the value of a planned tax-free lump sum been hit?  Perhaps you have more than one pension pot – can you afford to leave some pensions undrawn to give them more time to build up in value?

Lastly, consider whether the coming months are the right time to top up your pension savings, taking advantage of this point in the market cycle.

5. Be careful

At a time of heightened emotion in the markets – as in the wider world – beware of the risks.

For example, with pressure on household incomes because of the Coronavirus shut-down, it may be tempting to access your pension early.  But at best, this will make your retirement poorer.  At worst, it could be fraud.

In the UK, there have been warnings of scammers talking pension savers into too-good-to-be-true investments.

Take advice from a trusted source, and don’t be rushed into rash decisions.  Remember that doing nothing may be your best option.

After all, your pension funds have gone through many choppy markets in the past, and come out the other side.