Thanks to the coronavirus pandemic, stock markets around the world have fallen. Here in the UK, for instance, the FTSE 100 index — containing the stock market’s largest British companies — is down around a quarter. Which, with huge swathes of the economy simply shut down, isn’t too surprising. So it’s perfectly natural to wonder if pensioners and those saving for retirement are going to suffer a coronavirus pension hit.
The answer: it depends. Some people will suffer a coronavirus pension hit, while others won’t. And of those pensioners and savers who do suffer a coronavirus pension hit, for some the coronavirus pension hit will be severe, and for others it won’t.
So into which category do you fall? Let’s take a look.
Got a final salary pension scheme? Of the sort offered by the public sector, or those relatively few private sector employers that still offer them?
You’re in luck. Your pension is dictated by your salary and length of service, and what happens to the stock market is irrelevant.
Even in the case of private sector schemes with underlying stock market investments, funding your pension is someone else’s problem: the scheme itself might suffer a coronavirus pension hit, but shareholders will have to make it up by contributing additional cash.
Is your final salary pension actually being paid now? In other words, have you retired from either public sector or private sector employment? Again, you’re in luck. There won’t be a coronavirus pension impact: your monthly payments will continue unchanged.
And if you’ve retired — irrespective of the type of pension scheme — is your pension an annuity? If so, then yet again there won’t be any coronavirus pension impact.
That’s because the annuity providers — typically, large insurance companies — fund their annuity payments from highly liquid bonds and gilts. These are matched to their annuity payment obligations, and unconnected to gyrating stock markets.
These days, most private sector employees are in so-called ‘defined contribution’ or ‘money purchase’ schemes. Here, your pension savings are invested for you, and the size of your pension depends on how those investments perform.
Also in this camp are pension savers — including the self-employed — saving for retirement in Self-Invested Pension Plans (SIPPs), stakeholder pensions, and similar investment vehicles. Stocks and Shares ISAs also fall under this heading.
And clearly, with stock markets down by a quarter or so, those investments won’t be looking too good at the moment.
That isn’t to say, though, that there will be a comparable coronavirus pension impact. Those with a decade or more to go before retirement shouldn’t see much impact at all. Even with five years to go, the coronavirus pension impact may be modest.
It’s also worth making the point that pension investments aren’t wholly linked to stock market index movements: not only do pension funds invest in safer, less volatile stock market investments, but they also have assets in bonds, gilts, and property.
Again, this softens the blow.
Are you already retired, or planning to retire soon — and using a SIPP, stakeholder pension, Stocks and Shares ISA or similar investment vehicles to fund that retirement? Especially if you’re planning to go down the drawdown route?
If so, the coronavirus pension impact will potentially be much greater.
Those planning to retire soon might want to re-think that, and retire a little later, when their investments have recovered.
Now certainly isn’t the time to get the best deal on an annuity, and drawdown plans will see you eating into your capital faster than otherwise, because so many companies have suspended or reduced their dividend payments.
And if you were planning on leaving your capital more or less intact, and just rely on the ‘natural yield’ in retirement, that natural yield won’t anything like as high as it would have been a few weeks ago.
Again, the coronavirus pension impact bringing that about is all those suspended or reduced dividend payments.
Things will recover, but the bottom line is that you’ll need to tighten your belt, or delay retirement.