UK PENSIONS IN THE MIDST OF A PANDEMIC

The second in my “In the midst of a pandemic” series of articles will be about pensions.

The next 2 in the series will be surrounding:

·      Property

·      The future - switch to digital and WFH

Pensions

I will focus on UK pensions in this article however the following will also apply to most global pension arrangements.

Firstly, it is important to understand that there are 2 major types of pensions in the UK, the first is defined benefit or final salary and the second is defined contribution also known as money purchase or personal pensions. The main difference between a defined benefit scheme and a defined contribution scheme is that the former promises a specific fixed income usually from the age of 60 or 65 for the rest of the members life and the latter depends on factors such as the amount you pay into the pension and the fund's investment performance. It is a pot of money which can be drawn from flexibly or used to purchase an annuity from age 55. Both types of pensions have been affected differently in recent weeks.

Defined Contribution:

Anybody with a private or workplace pension scheme will generally have exposure to investments in the stock market. As a result, the stock market slump has caused the value of pensions to plummet over recent weeks.

Should you be concerned about your pension in the long term?

In most cases no.

While the coronavirus will likely continue to shake markets, long-term investors should not be too concerned.

If you do have some years before you’re planning to draw on your pension, then there is time for your pot to achieve growth over the long term and recover from this hefty drop in the stock market. Historically, stock market crashes like this usually recover in the following years, most recently we can look to 2008 and the years that followed. I should note however that the Corona virus pandemic is unique in modern times, so we are in somewhat unchartered territory.

If you are already drawing funds from your pension you should avoid drawing any more than you need to right now, whilst markets remain low drawing from your pot will be crystallizing losses and the more you can leave invested the more you will benefit when the markets do recover.

If you are planning to begin drawing from your scheme in the short term you should consider delaying taking your pension for the same reasons above. If you don’t need the money, delaying drawdown for a period of time eg 12 months could prove to be very beneficial to your retirement planning.

Consider who is your pension with?

Now is also a time to consider who is managing your frozen UK defined contribution scheme(s). If you are living abroad and have lost touch with you UK scheme do you know exactly what your drawdown options are at retirement? Are the funds invested to match your attitude to risk? Whilst in quarantine it is a great time to look into these schemes and consider a transfer / consolidation into a more appropriate arrangement.

Defined Benefit

Holders of final salary pensions have technically speaking lost nothing with COVID – 19 thus far as their pay-outs are theoretically guaranteed. However, additional falls in the markets will mean these schemes will inevitably drop further into deficit, requiring employers to somehow find the cash to plug the gap.

This, along with poor economic conditions and whole industries coming to a halt will unavoidably lead to more final salary schemes failing. When a final salary scheme does fail to meet its obligations in this way the pension falls into the Pension Protection Fund (PPF). Generally, those people below the normal retirement age of the scheme when the PPF is appointed to manage a scheme will receive 90% of their accrued benefits. This compensation is subject to an overall cap, therefore individuals with a large deferred income will be impacted considerably.

The PPF is funded by a series of levies applied to all final salary pension schemes. the management body of the PPF do have the right to reduce the level of compensation being paid from the scheme should the PPF itself suffer financial difficulty. The government does not underwrite the scheme.

Measures have already come into effect to protect schemes, the pension regulator published guidance on Friday (March 27) allowing Defined Benefit schemes to delay member requests to transfer out of the scheme by up to three months.

This is thought to give trustees more time to calculate cash equivalent transfer values (CETVs) as due to falling markets caused by the coronavirus pandemic, it is now more difficult for them to be sure of the underlying value of pension funds.

Some schemes will have also experienced an increase in requests for CETV calculations which would place additional strain on administration teams. 

I have not felt the effects of this statement by the regulator just yet and most DB scheme administrators i have approached for a CETV on behalf of clients appear to be processing requests as normal.

I have also received an increase in requests for CETVs (Cash equivalent transfer values) out of defined benefit schemes in the last few weeks as members see an opportunity to invest in the low market and the prospect to considerably outperform the increases that a DB scheme offers. This market timing along with the aspects of control, flexibility and current high transfer values are meaning many people are considering a transfer at the moment.

Send me a message today if you would like to arrange a free review of any UK pension asset in excess of GBP 100,000 or if the deferred income of the defined benefit scheme exceeds GBP 5,000 per year.

All business that I do is honest, transparent and fee based only via telephone and email. I am set up to meet with you digitally wherever you are in the world! this means i am available 24/7, 365 days a year at my desk talking to clients.

Thanks for reading!

Warm regards

Danny Agg

Financial Adviser

Mobile: +34711006845

Whatsapp: +971568359553

This article does not constitute advice and is my own personal views and opinion and not those of SJB Global or SJB US - Blacktower Financial Management US LLC.