The quote from Winston Churchill has seldom been more appropriate and we certainly have a major crisis to deal with right now. Although it has a serious financial dimension it is primarily a Health Crisis, so we hope that you are well and have avoided the virus.
In the current situation it may be difficult to see many positives, but Lockdown will come to an end at some point and, meanwhile, this could be a good opportunity to do some of those things we have been putting off to another day, and to reduce the negative financial impact of the crisis on our families.
When we hear about major falls in investment indices many people think about the impact on their ISA or other ‘investment’ plans but how many consider the impact on their pension. In the days of final salary pension plans stock market movements were of no concern to members, provided the company was strong enough to survive the downturn, as it was down to the sponsoring company to increase their contributions to ensure the pension scheme was able to meet its obligation to members. However, most of us are now in some form of defined contribution pension which means we make cash contributions to the plan which then gets invested in funds linked to the stock markets to build up a fund by retirement age.
At retirement the accumulated capital can be used to provide an income by either purchasing an annuity to provide a guaranteed level of income for life, but now more often, a drawdown pension. This operates by cashing in a portion of capital each month to generate the required level of income and selling off investment funds when markets are down represents a serious risk to your financial security. In addition to the fall in unit values, reducing the number of units causes a further reduction in the level of capital remaining available to generate future income. By selling off units at a faster rate than was assumed when the plan was originally set up could, in a worst case scenario, mean running out of money at a time when you are still depending upon pension income to meet your living costs.
These factors are, of course, of most immediate importance to those either approaching retirement age or having already retired as younger people may have time to recover current losses. However, there are risks for everyone that will benefit from closer examination and the current period could provide a very useful opportunity to review your overall pension strategy. In truth we tend to choose a pension scheme and then want to forget about it until retirement, assuming that it will generate the income we need to fund the lifestyle we anticipate having when that day arrives. This may have worked reasonably well in the old world of final salary pensions and jobs for life, but it is extremely dangerous in the new world of defined contribution pensions and portfolio careers.
We suggest that now could be a very good time to review what has been the impact of the fall in investment values (brought about by the crisis) on your pension provision and do you know what the current scheme is now likely to provide at retirement? Remember falling interest rates will reduce your income from the capital you expect to accumulate, and current estimates suggest you need approximately £1,000,000 in your fund to generate income of £30,000 a year (before allowing for income tax or for inflation eroding the real value of that income). It is also important to consider whether the investments in your pension fund are ones that will benefit when the recovery arrives.
No crisis is ever a pleasant experience to live through, and certainly not one involving the level of death associated with the Coronavirus epidemic. However, with Lockdown certainly continuing in some form for several weeks, or possibly months, taking the time currently available to review your financial plans for the future could make a substantial contribution to you, and your family’s, future financial security. Why not speak to your Birchwood financial advisor who would be happy to work with you to evaluate how your current pensions have been impacted by the market sell off, how much they are likely to generate at retirement, and indicate how you may be able to close any gap between the that income and what you need to maintain the lifestyle you hope to have at that time.
Our telephone lines are being remotely manned from our normal number (01438 840888) and we are set up to discuss your questions either on the telephone or on a video meeting using any compatible device (smart phone, tablet or computer)..