How to protect your pension from coronavirus falls
PENSION savers and investors have seen the value of their pots tumble due to the coronavirus epidemic - but there are way to mitigate against future falls.
March saw the FTSE100 plunge 11 per cent - its worst day since Black Monday in 1987 as £160billion was wiped off shares.
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The market, which tracks the fortunes of the UK's 100 biggest firms, fell below 5,000 although it has since recovered to almost 6,000 at the time of writing.
But in uncertain times, how can we ensure our pensions are protected? The Sun speaks to two financial experts to find out.
If you haven't started a pension - consider doing so
Tom Selby, pension expert at investment company AJ Bell, says if you can afford to set-up a pension there's no reason not to do so now.
What funds should I invest in?
ALWAYS do your research before investing and ensure you spread your money across a range of different funds.
Tom Selby, pensions expert at investment firm AJ Bell has picked out some possible options to consider right now.
Bear in mind these are all active funds, which are likely to cost more than cheaper passive funds so do your research on the fees involved before investing. If you're unsure, get advice from an independent financial adviser. You can use to find one near you.
- Worldwide Healthcare Trust (0.9 per cent ongoing charges fee (OCF)) - This is a possible fund for adventurous investors with a long time frame to invest. It invests in pharmaceutical and biotech companies, which are in high demand at the moment due to coronavirus.
- Jupiter UK Special Situations (0.76 per cent OCF) - This fund could be an option for balanced investors with a long time frame to invest as it focuses on unloved UK firms that will hopefully increase in value - it's also particularly geared towards companies that may benefit from Brexit.
- Royal London Short Duration Global High Yield (0.58 per cent OCF) - This is a bond fund that could suit cautious investors with a long time frame as bonds are typically lower risk than equities.
- Personal Assets Trust (0.91 per cent OCF) - This is a trust that specialises on preserveing what you've invested throughout market turmoil.
- Man GLG UK Income (0.9 per cent OCF) and the City of London Investment Trust (0.39 per cent OCF) - These funds focus on paying dividends - or an income - so they could be suitable for those in retirement looking to live off any income their investments make.
Opt out of auto-enrolment and you miss out on at least a 3 per cent contribution from your employer, as well as tax relief added by the government on top.
Maike Currie, director for workplace pensions at investment company Fidelity International adds that now is a good time to start investing when markets are low.
She said: “When you ‘buy low’ you’ll reap the rewards when markets rise again.
"If you have a long time frame to invest it also allows for your money to benefit from the power of compounding - the snowball effect of generating returns on previous returns - which can significantly boost the value of your pension pot over the long run.”
If you're a long way from retirement - spread your risk
If you're young and you know retirement is a long way off, Mr Selby says the best thing to do is to check what your pension is invested in, and ensure you're comfortable with it.
Many of us will have been automatically-enrolled into our workplace pension's default fund but you usually have the option to switch away from this and pick your own investments.
If you do this, don't put all your eggs in one basket - ensure you invest in a range of different assets.
If you're a beginner, funds may be more suitable than individual company stocks and shares as these pool multiple companies into just the one fund to try to mitigate risk.
Funds can range in asset classes from ones focusing on companies (known as equities) to others that look at property or bonds (company debts).
You can pick active versions run by fund managers or passive ones, which track a particular stock market index, such as the FTSE 100.
Passive funds, on the whole, tend to be cheaper so do your research first to check what's right for you.
You should also try to stash cash away each month to ride out any market storms rather than sticking a lot of money into your pension in one go.
Mr Selby points out that in the last two major financial crises - the Dot Com Crash in 2001 and the Great Financial Crash in 2008 - someone who drip-fed £1,000 a month into a FTSE100 index fund could have experienced half the losses of someone who invested £12,000 at the start of the year.
Ms Currie adds that you should sit tight through rocky periods and try not to withdraw money when markets have fallen.
“Just hold tight," Ms Currie said. "By withdrawing funds when they’re at lower levels, you are compounding any losses that you could very easily have made up. The key is not to panic.
"Market ups and downs are normal over the short-term – staying invested over the long-term will often mitigate the effect of the highs and lows seen in recent days."
If you're nearing retirement - think about the end goal
Mr Selby says if you’re within five years of retirement and are planning to use your pension pot to buy an annuity - an insurance product that provides a guaranteed income for life - you should first reduce your exposure to potentially volatile equities so your returns are more predictable.
Also ensure you shop around for the best annuity deal and tell your insurer about any health conditions as this could boost your rate.
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Just be aware that once you've purchased an annuity that's that, you can't sell it.
If you’re planning to stay invested through drawdown your investment time horizon might be longer, meaning you can potentially ride out short-term fluctuations in performance.
Mr Selby adds that you might want to consider delaying retirement, if possible, until we have more certainty.
Also bear in mind if you start accessing your pension the amount you can save tax-free each year falls from £40,000 to £4,000.
If you're in retirement - monitor your investments regularly
If you're already drawing from your pension but you've kept some of it invested, Ms Currie recommends regularly reviewing your pot and considering withdrawing any cash investments first to allow your investments the opportunity to recover.
She said: "At retirement stage, many investors will have gradually reduced their appetite for risk and so, a portfolio on the brink of pension drawdown will usually hold a higher level of cash and less volatile assets than in the early stages of accumulation.
"Cash reserves can be used to cover dips in the market without touching the actual investment."
Alternatively, you could just withdraw the dividends or income earned from your investments leaving your capital untouched, although Mr Selby points out that paying an income could be "particularly challenging" right now with many companies suspending dividend payments.
Ms Currie adds that temporarily reducing the amount of income taken from a pension may be another useful way to lessen the effect of market activities.
If you're unsure, get advice from an independent financial adviser. You can use to find one near you.
More on pensions
In related news, pension savers have been warned death benefits may be lost if they opt out of schemes because of coronavirus.
While hundreds of companies have stopped paying pension top-ups during the coronavirus crisis.
And some experts have warned the state pension triple lock must be axed to help pay the UK's coronavirus bill.