With Covid -19 causing market volatility and financial uncertainty, employees due to retire this year may be worrying about the impact of the pandemic on their retirement savings and retirement plans. The key message for these individuals is to keep calm and do not panic.
Employees should be reassured that if they are entitled to a state pension, it is unaffected by fluctuations in the stock market. And for those with a defined benefit pension, any investment risk is usually borne by the employer, so they are also not directly affected by stock market movements.
For those with defined contribution (DC) pension savings, if they are in a workplace pension, investments will generally be designed to move into lower-risk assets, such as cash and bonds, as members approach retirement, known as lifestyling. This means that the current stock market volatility should have less of an impact on these members. However, for those individuals who have chosen their own investments within a DC scheme and invested primarily in equities, the value of their DC pot is likely to have fallen.
For individuals very close to retirement, recent stock market falls may mean now is not the best time to begin drawing their pension or taking an annuity. They may have to consider taking a lower income than planned or delaying retirement. If they access pension savings now, they might miss out on any increase in fund values if markets recover in the longer term. In addition, as interest rates have been cut, the amount of income a member will receive from an annuity is also likely to be reduced.
The Covid -19 crisis may prompt pension scheme members to consider moving their pension savings, switching investments or accessing their benefits when they would not otherwise have done so. Doing so at this time would crystallise investment losses when the market is at a low and this will have the biggest impact for those closest to retirement. There is a risk of taking actions that have long-term financial consequences for retirement that are later regretted.
The Pensions Advisory Service stresses that the most important thing is not to panic and make rushed decisions before talking to someone who can help and taking independent guidance or advice. Employees over the age of 55 thinking about accessing their retirement savings should consider taking the free guidance available through Pension Wise, before taking any action.
The Pensions Regulator is particularly concerned that fears over personal finances and employer stability will make pension scheme members, including those at retirement age who are looking to access benefits soon, more vulnerable at this time to pension scams luring them to transfer to ‘safe havens’. Upcoming retirees should be cautious about any unsolicited approaches and should take a look at the Financial Conduct Authority’s ScamSmart website to ensure they know what to look out for when it comes to scams.
Emma Martin is an associate director at Sackers.