From early on in the Coronavirus pandemic, it has been apparent that older people are more vulnerable to the disease. The over-70s and anyone with underlying health conditions have been advised to isolate as far as possible.
We are not medical experts, and would urge you to follow professional advice. But aside from the health impacts, pensioners may also be affected by the financial, social and economic consequences of the disease itself, as well as attempts to contain it.
How Your Pension Might Be Affected
If you currently receive a pension, you may be concerned about the security of your income given the volatility in the economy. Some pensions have guarantees or safeguards attached, although the application of these can vary.
Annuities
If you receive an annuity from an insurance company, this is guaranteed for life. Companies are only allowed to offer annuities if they have sufficient financial reserves to cover the payments. Depending on the terms agreed at outset, your annuity may include inflation-linking, capital guarantees, or a pension for your spouse if you were to die.
Annuity providers have struggled in recent years, as Pension Freedoms have led to reduced demand for a guaranteed, but inflexible, retirement income option.
If the annuity provider does fail, pensions in payment are protected by the Financial Services Compensation Scheme (FSCS). The scheme will cover 100% of your annuity income with no upper limit.
So if you rely on an annuity for your pension income, you are in a reasonably secure position.
Scheme Pensions
If you receive a scheme pension from a former employer’s defined benefit pension scheme, your pension is also guaranteed for life.
But employer schemes can be more vulnerable to insolvency. Most of these schemes were set up many years ago when life expectancy was much lower and interest rates were higher. Schemes are having to take more financial risk to grow the scheme funds and be in a position to cover all their responsibilities.
If the scheme is underfunded, the employer is responsible for covering the extra costs. This may be difficult in the current climate, particularly if the company is in one of the hardest-hit sectors.
Some schemes have offered their members the option to transfer out of the scheme, although this is not an option if you already receive a pension. It does help improve the scheme’s financial position for its remaining members, however.
If you receive a scheme pension and your former employer (and therefore the pension scheme) becomes insolvent, the company has various options to try and restore stability to the scheme. If these fail, the scheme can enter the Pension Protection Fund (PPF).
The PPF will cover your scheme pension in full if you have already reached your normal retirement date.
If you have not yet reached retirement age, the PPF will cover up to 90% of your pension, up to an overall cap, which depends on your age. For example, at age 60, the cap is £34,749.
For public sector schemes, your pension benefits are covered by the government. The scheme may be ‘funded’ by an investment pot, or ‘unfunded,’ and paid for by the contributions of current members. These schemes are the most secure, although existing members are at risk of further government cuts, particularly in the aftermath of what is proving to be a very expensive crisis. Retired members are not likely to be impacted.
Drawdown
If you receive your income from a pension drawdown plan, you may have noticed some fluctuations in your fund value. While it may be a year or two before the value is recouped, your financial adviser can help you manage the risks. For example:
- By ensuring the fund is aligned with your attitude to risk.
- By keeping aside a reasonable amount in cash. This means that any short-term expenditure can be covered and that you don’t need to dip into your invested funds at a low point in the market.
- By managing withdrawals in line with your cashflow plan. While it may not be possible for you to stop taking money out of your pension, perhaps you can reduce the withdrawal amount, or even just avoid increasing it for a few years.
Most importantly, you should not take money out of the market at a low point unless absolutely necessary. You may miss out on the best days of the recovery, impacting your long-term returns. When investing, we expect the highs and the lows.
Your Savings and Investments
It is likely that your investments will also be experiencing some volatility at the moment. Again, the best option is to stick with the investment plan, ensure your portfolio is diversified, and don’t take money out unless necessary.
While not directly related to the Coronavirus, bank interest rates are at an historic low point, with the Bank of England Base Rate dipping to 0.1%. This will affect savings rates, meaning that your cash holdings may not keep their value when adjusted for inflation. It is worth shopping around for the best rates, even considering higher-interest fixed-term deposits if you don’t need to access the money for a while.
The last financial crisis reminded us that banks were not infallible. If your bank fails, the first £85,000 is protected by the FSCS. This applies per individual, so a joint account can hold up to £170,000 and still benefit. Temporary high balances of up to £1 million (for example from selling a property) are also covered.
It’s worth spreading your money amongst multiple banks if you can. Remember that the compensation applies to banking groups, not single brands. So if you hold money with HSBC and First Direct, or Halifax and Bank of Scotland, for example, this only benefits once from the compensation scheme.
For Isle of Man residents and use of banks please see further information on the Isle of Man Depositors’ Compensation Scheme (DCS) here: https://www.iomfsa.im/consumer-material/isle-of-man-depositors-compensation-scheme-dcs/
Embrace Technology
Pensioners may be in a more secure financial position than the working population, many of whom currently can’t work but still need to earn a living.
But if you are not working or home schooling, it can be difficult to deal with the boredom and loneliness. The new isolation measures mean that many of our hobbies and social activities are no longer available to us.
It is more important than ever to stay connected to the world, and technology allows us to do that. For example:
- Using FaceTime and Skype to keep in touch with friends and family.
- Taking online courses or learning new skills. For example, there are several recipe videos and art tutorials on YouTube. For more intellectual topics, various higher education institutions, from the Open University to Harvard, offer free online courses.
- Following online fitness videos.
- Reading eBooks on a Kindle or tablet now that the library is closed.
- Arranging online deliveries – priority slots are available from supermarkets if you fall into one of the vulnerable categories.
- Watching your chosen films and TV series on streaming services, rather than relying on broadcast TV.
Keeping in touch with your local community through Facebook pages. This can allow you to access help if you need it, or to help others if you can.
Please don’t hesitate to contact a member of the team if you would like to find out more about your retirement options.
The information provided on the pages, blogs and articles contained within this website are solely for information purposes only and do not constitute financial advice. Professional advice should always be sought from a financial adviser.
