Author: Jenny Pearce / March 27, 2020
My Workplace pension and COVID 19
The spread of COVID-19 has contributed to a significant fall in share prices and, for many people, a significant reduction in the value of their pension pot.
Though this can be worrying but it needs to be seen in the context of long-term stock market performance.
Pensions are intrinsically a long-term investment. It’s to be expected that the value of individual pension pots will go up and down from time to time, and more so in times like these when not only businesses but entire nations face a period of great uncertainty.
Should I stop paying into a pension in a time of Economic Uncertainty?
Members are able to reduce or stop paying into their plans, we appreciate some may be forced into this position, but we urge all members to think through the implications before they make their decision. There are four areas we would encourage members to look at;
When you pay in your employer pays in
if you stop paying in your personal contribution it is very likely the employer will also stop paying in
Your Pension contribution will receive Tax Relief
Each pension contribution you make will receive tax relief at your marginal rate. This means for a basic rate taxpayer an £8 pension contribution becomes £10 and for a higher rate taxpayer £8 will become £12.
Benefit of pound cost averaging
The best way to invest in a falling market is by dripping money in, because you pick up shares at cheaper prices but without risking a lot of money. If markets fall again, it’s unfortunate, but also means you can just buy more at an even lower price. This will mean losing some money in the short term but at the benefit of buying shares at lower prices in the long term.
The wonders of compounding mean those with many years until retirement will take significant advantage by making payments today – our cost of delay calculator helps identify this difference:
What does this mean – for a 35 year old that wishes to retire at 65, by continuing to pay in now you could receive a pension:
- 34% higher than if you waited 5 years and made the same monthly payments
- 88% higher than if you waited 10 years and made the same monthly payments
Assumes a growth rate of 5% if contributions remain constant
COVID-19 is having a far-reaching effect, which is contributing to turmoil on world stock markets and pushing share prices down. History shows that stock markets do recover. What we don’t know is when, by how much and for how long this downturn will last.
In the circumstances, it’s understandable to be concerned about your investments but we would recommend that pension savers remain calm, make informed decisions according to their personal circumstances and avoid acting in haste. For some it may even be a good time to invest more into the pension.
If you have any concerns or would like to discuss your pension, please get in touch with us.