What Does Coronavirus Mean For My Pension And Retirement?
As the coronavirus pandemic continues to dominate world headlines, here’s what it might mean for your pension and retirement plans.
The pandemic has created uncertainty in economies around the globe. As a result, stock markets have experienced shocks and over the last few weeks have seen significant falls. Fears of a recession following the pandemic have sparked even more concern. It’s natural to be worried about what the impact on financial markets means for your future. Understanding what the change means, and where adjustments may need to be made, can help you plan for retirement with confidence.
What impact has coronavirus had on pensions?
For most people, pensions will be invested. This gives your pension an opportunity to grow over the several decades you’re likely to be paying into a pension. However, it does mean your retirement savings are exposed to market volatility. In the last few weeks, this will mean pension values are likely to have fallen.
The full impact will depend on where your pension is invested. It’s important to keep in mind that a pension doesn’t just hold stocks and shares, other assets are used to create balanced portfolios. So, whilst news updates may say the stock market has fallen 20%, it’s unlikely your pension will have suffered a fall on the same scale.
If you’re worried about your pension, it’s worth checking the value. However, keep in mind that short-term volatility is to be expected at the best of times. Keep the bigger picture in mind and look at the value of your pension with your retirement plans in mind.
The impact coronavirus will have on retirement plans will depend on what stage you’re at.
- Your retirement is still several years away
If retirement is still some way off, the current market activity shouldn’t affect your retirement plans.
You should always invest with a long-term goal in mind, this provides an opportunity for peaks and troughs to smooth out to deliver gradual investment gains when you look at the bigger picture. Whilst past performance isn’t a reliable indicator of the future, previous market corrections and crashes have always been followed by a period of recovery.
So, whilst it’s natural to worry if your pension value has fallen, stick with your long-term plan.
- You hope to retire soon
If retirement is nearing, it’s natural to worry about your pension in any circumstances. It’s a life milestone that means we often have to change the way we view income and finances. As a result, a stock market crash just before the date can be worrisome.
The first thing to do here is to put the stock market falls into perspective. You’ve likely been saving into a pension for many decades. No one likes investment values to fall, but when you look at it in comparison to the gains made, you’ve probably done well financially.
You also need to look at your pension value in the context of your retirement plans: Will the current value of your pension provide you with the income needed throughout retirement? If not, what is the shortfall?
This can be difficult to weigh up, as there are numerous factors to take into consideration. Working with a financial planner can help you understand how the pension figure translates to a retirement lifestyle. If there is a shortfall, there are often steps you can take to bridge the gap, from delaying retirement to using other assets.
It’s also worth noting that, depending on your goals and desired retirement lifestyle, your adviser may have ‘lifestyled’ your pension already. This is where your savings are switched to a lower risk profile that aims to preserve the savings you already have as you near retirement. If this is the case, it’s likely the impact on your pension is lower as you’ll be less exposed.
- You’re already retired
If you’re already retired and choose to access your pension flexibly using Flexi-Access Drawdown, the current activity may have an impact. This is because your pension savings remain invested with the goal of delivering returns whilst you’re retired. However, the flip side of this is that you’re exposed to market volatility.
The important thing to recognise here is how your withdrawals will have an impact in the long term. Making withdrawals whilst the market is low means you must sell more units to secure the same income. This can deplete your retirement savings quicker than expected. As a result, it’s worth reviewing how much you’re withdrawing.
If you’re able to reduce withdrawals or temporarily pause them, this can help to minimise the impact on your pension savings in the long term. You may have other assets, such as cash savings, that can be used to tide you over until the markets begin to recover. If you find yourself in this situation, please contact us. There are often solutions that will enable you to maintain your lifestyle and future.
Having confidence in your retirement aspirations
Whether you’re already retired or you’re still working towards that goal, it’s important to have confidence in your plans. This includes understanding the lifestyle your pension will provide and how market shocks would have an impact over the short and long term. This is where financial planning can help. If the recent volatility means you have concerns about pension investments, we’re here to help you. In some cases, it may simply be understanding how pensions will grow over the next ten years, in others, adjustments may be necessary, such as reassessing your risk profile or increasing contributions. Please contact us to discuss your pension and retirement goals.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Is A SIPP The Right Investment Product For You?
The Self-Invested Personal Pension (SIPP) was first introduced over 30 years ago and large numbers of investors have opted for one since. Their greater flexibility and the amount of control they offer has led to them being branded ‘DIY pensions’ in some quarters.
If you’re confident about investing in the stock market and have a sizeable pension fund, or you’re looking to use a pension product to invest in commercial property, then a SIPP may well be the right option for you.
But they’re not for everyone. Greater control means greater responsibility and a potentially increased risk.
What is a SIPP?
A SIPP is a Self-Invested Personal Pension, open to anyone who meets the eligibility requirements of their chosen SIPP provider.
A minimum fund size may apply, and this might be comparatively high. This is because the costs of administering a SIPP can be larger than for a standard personal pension, due in part to the flexibility and control a SIPP offers.
A SIPP can give you greater control because you can choose from a wider range of investment options but you can also opt for a managed portfolio, based on your risk profile.
You can also use a SIPP to invest in commercial property.
Still, a SIPP is unlikely to be right for first-time or beginner investors.
Why might you choose a SIPP?
SIPPS can be a great investment choice in some circumstances and for a certain type of investor. You might choose to open a SIPP if:
- You have experience of investing
A SIPP gives you control over the investments you choose but this means greater responsibility too.
You’ll likely have complete flexibility and control over your investment portfolio, with a wide range of funds to choose from and different asset classes available.
This might increase the potential for investment growth but also means you’ll need to have a very definite understanding of your attitude to risk.
Your SIPP provider might offer a range of bespoke portfolios, tailored to different risk profiles.
- Your pension fund is large or you intend to invest a large amount
SIPPs can be more ‘hands-on’ for both you and your SIPP provider. This can lead to higher charges than with other pension products.
If your pot is large, you may be able to soak up these additional costs (your SIPP provider may have a limit on the minimum investment). Even if your initial investment is low, if you intend to significantly increase contributions once the SIPP is in place, this may offset the charges.
- You’re looking to hold commercial property in your SIPP
Commercial property could include business premises, factories or offices, and there are two main ways that these can be held in a SIPP.
- Use your pension fund to purchase the property, placing the premises directly in the SIPP
- Use equity release on a property you already own to effectively exchange a pre-existing pension pot for the property. This approach is considered extremely high risk and will only be appropriate in limited circumstances.
Holding commercial property in a SIPP has benefits, including:
- The rent you receive is paid directly into the SIPP, rather than counting as personal income, and therefore isn’t liable to Income Tax
- You won't pay any Capital Gains Tax on the sale of the property – because the property is held in the SIPP and any gains belong to the pension
- You can also use up to 50% of the SIPP value as a loan to purchase your commercial property, held against the value of the SIPP. Your personal (and professional) finances are protected if the property is repossessed.
When wouldn’t you choose a SIPP?
A SIPP isn’t a mass-market product but was instead intended for a very selective market. Its move into the mass-market has led to some people being invested in SIPPS who shouldn’t be – paying higher fees when they would be better off in a personal pension.
Consider an alternative to a SIPP if:
- Your pension pot is relatively small
SIPPs can have high charges compared to other pension products. Whereas a high fund value can help to soak up these charges, if you have a relatively small fund, you could see a large portion of it eaten up.
Consider whether other pension products might be right for you and if you’re still unsure, speak to us.
- You are a first-time, or relatively inexperienced, investor
SIPPs are complex products that offer a lot of choices.
They also offer the potential for increased risk. Although they might be suitable for experienced investors, consider other products if you are new to investing or still relatively inexperienced.
- You are risk-averse
The control and flexibility that SIPPs offer is great if you’re an experienced investor, but less so if you are new to investing. If you are risk-averse there are other pension products available – get in touch with us if you’d like to discuss your investment options.
Coronavirus, Life Insurance And Critical Illness Cover: What Will And Won’t Pay Out?
With more than 1.8 million confirmed cases of coronavirus worldwide and fears that up 80% of the UK population will fall ill as a result of the global pandemic, many people are looking to their insurance providers to clarify what will and won’t be covered.
If you have not received any clarification directly from your insurer, then here are a few facts that may help you understand your current position.
What does life insurance cover?
Whilst there are many different types of life insurance, strictly speaking, they should all do one important job – pay out if you die during the term of the policy. This relies on you having kept up to date with your premiums, answered all the application questions honestly, and, if you have a term life insurance policy, that you are within the covered period.
All life insurance policies will contain some special circumstances under which they will not pay. These, however, will vary from policy to policy. To be sure exactly which exemptions apply to your policy, you must take a detailed read through your policy documents or contact your provider for clarification. Some, for example, will not pay out if you are deemed culpable for your own death in some way.
However, the life insurance companies who have so far issued statements have all made it clear that they will be honouring all policies where death occurs due to the coronavirus pandemic.
What do the life insurance companies say about coronavirus?
In common with other major insurance providers, Zurich say that if a customer holding a Zurich life insurance policy dies of coronavirus, they will pay out following their “normal claims process and assessment”.
Aviva are also clear they will be paying out.
“With the news that Covid-19, more commonly known as coronavirus, is spreading across the UK we want to give you clarification around our claims and underwriting position.
We're continuing to pay all valid claims and committed to giving you access to valuable protection insurance. We remain a market-leading protection insurer for claim paid amounts.”
Vitality state that “Covid-19 or any other infectious disease which results in the plan holder dying, will be covered.” Beagle Street have stated the same.
While some insurers have not yet issued any statement regarding the Covid-19 outbreak, those who have make it clear that there is no pandemic or epidemic exclusion for life insurance.
This means if you have a current life insurance policy and you have continued to pay your premiums, your beneficiaries should receive a pay out if you die from Covid-19 or related complications.
What about Critical Illness cover?
When it comes to Critical Illness cover, however, things become a bit less straightforward.
Generally, insurers have been saying that they will not pay out on Critical Illness cover as a result of coronavirus because it is not a specified illness under the terms of their policy.
They also state that most people who contract it go on to make a full recovery which is, thankfully, true. However, around 5% of those infected face critical illness as a result of contracting the virus, including respiratory failure, septic shock and multiple organ failure.
Additionally, medical professionals are now saying that some of those who are infected with Covid-19 and who do not die from it, do suffer from what are most likely to be lasting lung conditions. Under these circumstances, you may be able to make a claim, but this will depend on the exact wording of your policy.
Zurich, in answer to enquiries on this question, have stated that:
“Coronavirus is not a specified ‘Critical Illness’ on Zurich’s policy.
Under our ‘Respiratory Failure – Of Specified Severity’ definition, it is possible a claim might be presented but the opinion of our Claims and Medical Officer is that the coronavirus is unlikely to produce the permanent symptoms or impairment to lung function required to meet this definition.
We will consider any such claims presented on the basis of the individual circumstances”
In response to enquiries from members of the public who are understandably confused and worried, the Association of British Insurers (ABI) have attempted to bring some clarity.
Their advice is that customers should expect insurers to treat any claim for coronavirus in the same way they would treat other claims for Critical Illness cover. They also advise customers to note that Critical Illness cover is only paid out where it falls under the specific set of criteria laid down in the ABI Guide to Minimum Standards for Critical Illness Cover.
All Critical Illness policies are required under these minimum requirements to cover heart attack, stroke and cancer, but beyond that, policies can and do vary. It may be that one policy covers for coma, respiratory failure and kidney failure – which may come about in the most serious Covid-19 cases – while others will not.
In other words, the only way to be sure what your Critical Illness policy will cover you or your loved ones for is to read your policy terms and conditions or check directly with your insurer. It may be that while coronavirus infection itself is not a covered condition on any Critical Illness policy, the complications that can arise from it, are.
Contacting your insurer
If you have any further questions about your policy cover, then you should in the first instance consult your insurer. Be warned, however, that their phone lines may be very busy at the moment, so it may be better to check their website for information. Most providers have updated their websites to include answers to specific questions about Covid-19 for worried customers.
The ABI provides some reassurance that while this is a particularly difficult time for claimants and insurers alike, they are doing everything in their power to keep their operations running as efficiently as possible and to offer clear and up-to-date information to their customers.
If you have any questions about the life or Critical Illness cover you have in place, please get in touch with us.
Please note
All details are correct as of 24th March 2020 and are taken from each insurance company’s website.
The World In A Week – Interim Update
US GDP fell 1.2% quarter-on-quarter; however, you may have seen the media run with headlines that stated growth falling by 4.8%. It seems pointless to annualise the data at this point, as one thing is almost certain; the next quarter will be a very different number.
There was no movement from the Federal Reserve, who held their Federal Open Market Committee meeting yesterday. They have already committed to do whatever it takes and the drop in GDP was fully expected, which was reiterated in Jerome Powell’s rhetoric.
Expectations are increasing on what the easing of the lockdown measures will look like in reality. Several European countries have already given broad indications of when the easing will begin. Preparations are apparently underway for the UK Government to issue detailed guidance on how Britain can safely go back to work.
Boris Johnson, after celebrating the birth of his son yesterday, is today expected to announce that the coronavirus is being contained, but that it is not yet time to lift the restrictions. Concern is about lifting the lockdown measures too early and run the real risk of a second spike of infections. Silver linings and management of expectations for the public is key at this moment.
The World In A Week - Balancing Act
The focus last week was mainly on the US, which is arguably seen as the new epicentre for the pandemic and, perhaps, the road map for the next phase in this battle.
US equities recorded their first weekly drop in April, illustrating a volatile week that saw indices buffeted by record unemployment claims, disappointing drug trials and an oil price that went negative. The week did end strongly though, as sentiment was lifted by the authorising of the fourth US economic relief package since the pandemic began.
President Trump signed off the $484 billion stimulus package into law, which aims to provide additional relief to small businesses, as well as hospitals, with the aim of increasing coronavirus testing. Never one to miss an opportunity to tweet, Trump also promoted the theory of pent-up demand on his Twitter feed; people in lockdown are generally spending less, meaning enforced savings, and it is those savings that could support a bounce back when the lockdown is lifted, as long as fear is contained.
Trump has also signalled support for ‘reopening’ in his Twitter feed, coinciding with the US state of Georgia, which has rolled back some of the lockdown measures, allowing small businesses such as hairdressers, spas and tattoo parlours to reopen. It also emphasises the dilemma of how social distancing will work at this interim stage, as all of the above businesses involve close contact.
The dichotomy of wanting to supply a service, to keep your business solvent, but at the same time wanting to keep your family safe through social distancing, is another challenge for people and governments to find a solution and tackle the fear of risk. If reopening is enacted too early, or people believe it is too early, fear of the virus could do more economic damage.
The next stage is a difficult balancing act of keeping the population safe, whilst managing people’s expectations for when the lockdown measures could be relaxed. Governments will want to restart their economies as soon as possible but acting too early could be worse than acting too late.
The World In A Week – Interim Update
There is always an anomaly that appears during a crisis to disrupt markets or economies to an extreme, and the COVID-19 crisis is no exception. Rising production and collapsing demand, due to a deliberate policy of an economic shutdown, is causing an unprecedented glut in the oil market. This has sent oil prices for West Texas Intermediate (WTI) to a multi-year low, which reached negative at one point.
Travel restrictions, due to social distancing stay-at-home sanctions, have reduced the global demand for oil by an estimated 5.6 million barrels per day (mb/d). Research conducted by BP shows that almost 58% of global oil demand is derived from fuel for transportation. This makes the current situation much worse than a normal recession because of the widespread implementation of travel restrictions.
This problem has been brewing for a while, with Russia and Saudi Arabia unable to agree on production cuts in early March. This caused a bizarre situation in which Saudi Arabia actually increased production and sparked a price war. The main oil producers gathered around the table at Easter and agreed to an historic cut in production to contain the oil glut. Production will be cut by 9.7 mb/d starting on 1st May. Cuts will begin to taper each month to 5.6 mb/d by the end of the year.
Despite the historic significance of the agreement, the agreed cuts do not appear to be aggressive enough to balance the large drop in demand. Oil inventories are likely to continue to rise in the short term, with storage facilities at capacity; this is putting further pressure on oil prices.
The anomaly of negative oil prices happened this week, with the May contract for oil delivery, for WTI, falling as low as -$40 a barrel. The situation was created by holders of the oil contracts having to pay to have the oil taken away and stored. Global storage of oil is almost at capacity, which increases the prices to have the commodity stored. This price of storage exceeded the actual price of the oil itself, thereby creating a negative contract.
This volatility in oil prices has spilled over into other asset classes, with global equities feeling the pressure. It is likely that the distortions we are seeing in the oil market will contribute to volatility in other asset classes, in the short term. However, it is expected that this period of extreme dislocation will dissipate in the second half of the year, as travel restrictions are gradually relaxed. So, while oil could contribute to volatility in equities and fixed income over the coming months, we do not expect it to become a major driver.
The World In A Week – Interim Update
Economic data is likely to become increasingly less reliable as a result of the COVID-19 lockdown. We know that the effect on the global economy will be bad, we just do not know how bad. That is why we are seeing significant stimulus packages from governments around the world and why they keep getting bigger. No sooner has the US announced stimulus package number three, at an impressive $2.2 trillion, there was expectation from politicians for stimulus package number four.
This dichotomy of knowing that the global economy is going to be damaged, but unable to accurately forecast to what extent, is why we have seen volatility in the markets and commitments to soften the blow increasing week-on-week.
Most economic data are survey based: industrial production, unemployment numbers, inflation numbers and various sentiment opinion polls need people to fill in the surveys. Filling in survey forms during a lockdown may not necessarily be representative of the whole. Social media spreads fear and affects sentiment and sentiment affects answers to surveys. Then you have issues such as consumer price inflation, which includes restaurant prices; how do you survey something that is not there?
It is likely that the data we will see coming out for the first quarter of 2020 will not be as reliable as it has been in the past. Interpolations of annualised numbers should be analysed with a fair degree of scepticism and investment decisions for the short term should not be made on this potentially soft foundation.
Although the extreme fear that was dominating much of March has slightly dissipated, we are still wary of the short-term outlook while in the midst of the virus crisis. Good news, such as the rumours that President Trump will cut taxes for US companies by suspending trade tariffs for 90 days, will elicit a good reaction from markets. While reports of increasing infection rates and deaths will provoke a negative reaction. Clear heads and predictable processes are needed in this phase of the crisis.
The World In A Week Interim Update - Apply. Rinse. Repeat.
This week we have seen the US Federal Reserve offer unlimited quantitative policy, along with various other bells and whistles. This is to keep the wheels of monetary policy lubricated; to encourage lending to companies by banks, and in turn this may save some jobs. It may also help to stabilise the markets, which would give enough breathing space to allow fiscal policy to be rolled out.
This is what we are seeing in the US. The Senate has now agreed a fiscal package worth over 9% of GDP and the buck is passed to The House of Representatives who will vote tomorrow on the $2 trillion deal. Co-ordination across the globe has been key and we have seen the European Central Bank announce today their unlimited commitment to asset purchases. In the UK, the Government continues to roll out more details about the £350 billion relief package.
All of this is about avoiding job losses. The more people that are unemployed means the less they are going to consume. If consumption drops, it will delay the second phase of the fiscal policy rescue package, which is the economic bounce-back.
In the US a quarter of the deal will focus on loans to businesses, to support them during this period and hopefully avoid an unnecessary increase in unemployment. President Trump is also riding to the rescue, with the possibility of a further tax cut through the suspension of trade tariffs for 90 days, which should alleviate pressure on some companies’ profit margins.
Apply. Rinse. Repeat. The same instructions that were given for the quantitative easing programme to combat the great financial crisis are being repeated for the great virus crisis. Only this time the measures being enacted are more dramatic; projections for the Federal Reserve’s balance sheet is a surge of more than $3 trillion. This will equate to an expansion of roughly 75% and is comparative to the entire stimulus injected over a decade since the global financial crisis. It is likely the current level of policy stimulus will not need to remain in place for as long as it did for the previous crisis. However, it is needed now as it was 12 years ago to prevent a global depression.
The World In A Week - Contagion
Basic evolutionary theory teaches us that adaptation is the biological mechanism by which humans adjust to changes in their environments. We find ourselves living in a period of great change, and it is those that adapt to change best that will come out on top, after the virus subsides.
In the UK, we are being urged to stay indoors and socially distance ourselves to prevent the spread of the virus further. As humans, we are experiencing significant structural reform as we adapt to our new working lifestyles and plan around the latest advice issued by the Government. Negligible commute times and a ban on outdoor social activity has created a great deal of free time for people to utilise. Governments across the world are assessing measures to restrict the economic disruption that the virus is causing.
It seems the UK’s approach has been more staggered than the rest of Europe’s with Boris briefing the nation daily by issuing more restrictions and providing further guidance. Whereas in Germany, gatherings of two or more people have been banned and illustrates a direct approach than it appears the UK are operating with. The UK are more focused with reducing their economic hit from the virus than reducing the spread of the virus and it is expected that more drastic restrictions in the UK will follow. The decision to close schools in England was made after Wales and Scotland. However, the ban for pubs, gyms and restaurants shows that Boris intends to issue more rigorous policies.
Rishi Sunak has offered £350bn in the form of loans and grants to save British businesses from insolvency and workers from redundancy. This economic response appears to be one of the most significant displayed from any major country. Germany has made available €500bn in the form of loans available to all businesses and has encouraged firms to defer their tax payments. There doesn’t appear to be a generic response, but fiscal stimulus appears to be the most popular decision taken. Hong Kong has selected a more direct stimulus and has pledged to give HK$10,000 to each citizen. However, with lock-down measures likely to be in place, this doesn’t appear to be an effective response.
The last pandemic was the swine-flu pandemic in 2009-10 which infected almost 1.4bn people globally but the death toll ranged from 151,700 to 575,500. Swine flu was more prevalent in younger people which we now know to be the opposite of COVID-19. The effect of swine flu was masked by the financial crisis of 2008. However, COVID-19 is the first pandemic to exist in the social media era where information and opinion is more readily available and is one of the major factors attributing to the high volatility of the global markets.
What we all need to appreciate is that we are living in a period of unprecedented change and we all need to be adaptive, bold and co-operative to ensure we continue to deliver to our clients.
During times of heightened market volatility, many investors feel a strong urge to de-risk and sell out of their equity positions. However, history has rewarded patient investors who stayed invested over a longer time horizon. There has never been a market drop without a subsequent rally and with equities at a major discount, this offers a suitable opportunity to top up your equity positions.
The World In A Week - Interim Update
Policymakers around the globe are turning to their fiscal armouries to meet the economic challenges that the Coronavirus is, and will be, causing. This is a welcome development and as we have written previously, central banks have all but exhausted what monetary policy can achieve.
President Trump is pushing for a stimulus package that could reportedly be as much as $1.2 trillion and UK Chancellor, Rishi Sunak, has unveiled £330 billion of state loan guarantees, with an additional £20 billion of financial handouts aimed to help businesses cope with the impact of COVID-19. These stimulus packages are looking to offset the short-run economic damage that is likely to be done from social distancing, travel bans and outright quarantines.
However, central banks still have an important role to play in this crisis. It is their role to ensure that the cost of borrowing remains low for the foreseeable future, in order that governments can do whatever is needed to overcome both the social and economic crises.
We have already seen the Federal Reserve reduce interest rates to zero in the US and our own Bank of England has pulled rates down by 0.5%. To supplement this, central banks around the world have already embarked on a fresh round of quantitative easing, buying up assets to reduce borrowing costs further and give support to the underlying economy. The European Central Bank has just announced a programme to buy €750 billion of bonds after an emergency meeting last night.
What we must remember is that this is not a repeat of the global financial crisis of 2008. 12 years ago, the great recession was caused by a collapsing housing sector and a lack of confidence in banks, meaning the risk at hand was a complete failure of the global economy. This time, the sectors that look most vulnerable are travel, tourism and retail, which combined accounts for 10% of the global economy and employ 10% of the global workforce (source: Fidelity Investment Management).
This is more akin to a natural disaster and the right thing to do in the event of an earthquake is to support those most affected by the seismic economic and social upheaval.