The coronavirus pandemic has had a devastating impact on pension funds, leaving many savers wondering what the future holds.
Pension savers with private and workplace pensions have seen significant falls in their funds during the coronavirus crisis, while annuity rates are at an all-time low.
Most workers in the UK have a private or workplace pension scheme which holds investments in the stock market. As a result, they have seen the value of their pensions tumble in recent weeks because of volatility caused by the coronavirus pandemic.
Defined contribution (DC) pensions build up a pot with contributions from you and your employer which are then invested to give you a return when you retire.
A record number of people saving into a DC scheme suffered heavy falls in their retirement pots during the first quarter of 2020, with only 11% of pension funds avoiding losses, according to Moneyfacts.
The average pension fund value fell by 15.2% in the first quarter of 2020. This is the worst quarterly performance on record, even beating the falls seen during the global financial crisis of 2008.
Many popular pension fund sectors posted even heavier losses, with Association of British Insurers’ UK Smaller Companies (-31%), UK All Companies (-29.8%) and UK Equity Income (-28.4%) pension funds hit the hardest.
Richard Eagling, head of pensions at Moneyfacts, says: “The hope is that these will prove to be short-term shocks, but for those planning for retirement now and looking for a retirement income immediately, they present unenviable challenges.
“UK pension policy has increasingly moved towards placing more onus on individuals to take personal ownership of their retirement finances in recent years and take on the risks associated with this, but unfortunately recent events have shown how vulnerable they can be to major world events.”
A growing number of people entering drawdown have been hit by the performance of their pension funds.
For many savers the drop in fund performance will be the biggest fall they have seen since the introduction of pension freedoms five years ago.
Pension freedoms were introduced in April 2015 and allow anyone over the age of 55 to take some or all of their retirement pot as a lump sum, with the first 25% paid tax free.
Not all pension funds will have fallen by the same amount. If you are in a fund with an appropriate level of risk, falls should be lower if you’re closer to retirement.
This is because people nearing retirement usually have their savings switched out of risky assets into safer investments.
Younger pension savers are usually in higher risk investments as they are able to ride out short-term fluctuations.
Annuities, which can provide a guaranteed income in retirement, are also at record low rates.
The average annual standard annuity income for someone aged 65 – based on a single life £10,000 level without guarantee annuity – fell by 6% in in the first quarter of 2020.
This leaves the average annuity income 1.7% lower than its previous record low in October 2019.
Falling pension fund values and lower annuity rates have had a severe impact on those looking to annuitise.
An individual who had saved £100 gross per month into a personal pension for 20 years would have built up a final pension fund of £41,388.
Moneyfacts calculates that using this to take an income through an annuity at 65 means they will receive just £1,663 per annum, down by 18.7% on the start of the year, and 14.4% lower than the previous all-time low in October 2016.
Helen Morrissey, pension specialist at Royal London, says: “Deciding to switch investments or stop or reduce contributions could actually make things worse as you risk crystallising a loss and making it harder for your pension to recover.
“Similarly, if you decide to annuitise now then you are locked into low rates. Things will improve and so where possible defer making decisions that have a long-term impact on your finances– a financial adviser will be able to take you through your options.”
What about defined benefit pensions?
Defined benefit (DB) pension schemes – sometimes called a final salary scheme – pay out a guaranteed income for life.
The amount they pay is linked to the number of years the recipient worked for a particular employer or the amount they earned.
They are calculated on your final salary so are not affected by the current market turmoil.
If your employer does not have enough money in the scheme to pay you in retirement, you are covered by the Pension Protection Fund.
Pension savers are being warned against transferring their retirement funds out of final salary schemes in the wake of stock market falls caused by the coronavirus pandemic as they could lose thousands of pounds.
Anyone looking to transfer from a DB to a DC pension during the COVID-19 crisis will get a letter from trustees telling them it is not in their best long-term interests.
Pension funds have a taken a battering with the coronavirus pandemic.
To find out more about how your retirement savings could be affected, check out our comprehensive guide on how to rebuild your pension.