Post-Pandemic Pension Pot Care â€“ A Guide To Patching Up Portfolios For Investors Of All Life Stageswritten by Bella Palmer
Pretty much any balanced investment portfolio, whether it’s a pension pot or not, will have seen its value take a bit of a battering over the last several weeks. But every investor should know that market downturns, even sever ones, are inevitable over the life cycle of long term investments. It’s not about bad luck when these periods happen – it’s inevitable. So don’t panic.
The important thing is how investors handle financial market crashes. Approached them in the right way and these can be exactly the moments that super-charge long investment returns because they are an opportunity to buy cheaply and take advantage of the eventual market recovery.
Granted, it’s far from ideal for investors who are already drawing down from their pension pots. Especially for anyone who hasn’t taken the advised approach of those in or approaching retirement and moved part of their portfolio into assets, like fixed income bonds, that protect against losses in exactly moments like we are experiencing now.
But that doesn’t mean it has to be a disaster. Far from it. As long as you do take some sensible steps now to minimise short-term losses and then hopefully make them up in coming years.
Here are our top tips for protecting pension pots during the market’s period of strife, wherever you are in your investor journey, from just starting out to already drawing down.
Pension Pot Protection Strategies If You Are Already In Drawdown
If you are already drawing down an income from your pension pot, but have left it invested rather than having converted it into an annuity for guaranteed income, the most important thing you can do now is not panic.
It might take a little nerve if you’ve been watching the news and seeing stock markets drop by around 30% since the onset of the Coronavirus sell-off. As well as listening to analysts who think markets will fall further before things start to get better. And they may be right. But the best hope you have of repairing your pension’s value without sustaining too much long term damage, is to stay invested.
Selling off funds and shares now to cut your losses will in fact only crystalise what are still only paper rather than real losses. Losses aren’t a reality until you sell assets.
What you can and probably should do is, within reason and leaving yourself enough to live on without any genuine hardship, reduce withdrawals as much as you can. If you had planned on withdrawing, for example, 5% of your pot’s value per annum, you can stick to the percentage, rather than the cash value.
For a £200,000 pension pot, 5% would be £10,000. If your pot has lost 30% of its value since the beginning of the stock market downturn, try to get by on withdrawing just £7000. The difference may not seem like much but it keeps you on course for your pension income lasting the same amount of time as it would have before the loss of value. When markets recover, you can go back to your original plan with no long term harm done other than you having to temporarily tighten your belt in the meanwhile.
Use Cash Reserves If You Have Them
If you have cash savings you can spend instead of drawing down from your pension pot now would be a good time to do so. The more of the investments that have taken losses you can hold onto until their value recovers, the better. That’s exactly why funds and professional investors tend to keep a cash allocation. It comes into play when investments are down and spending the cash means they don’t have to be sold, crystalising losses.
Only Draw Down Dividend Income
This tip might be easier said than done, considering how many companies and sectors are cancelling dividends at the moment. But if you are lucky enough to have a pension pot that continues to generate enough cash from dividends that it covers all or part of your drawdown plans, you can change your investment instructions to withdraw rather than re-invest those dividends. That will allow you to avoid selling investments.
Sell Fixed Income Investments First
If you do have fixed income assets such as bonds, selling them now is exactly why you bought them in the first place. During good times, investor grade fixed income investments usually offer far more modest returns than riskier assets like growth stocks. But during market downturns their value usually actually goes up as investors sell out of stock markets and move into defensive alternatives.
But if you already have fixed income assets, this is the moment to sell them to fund your drawdown without taking losses on equities and other riskier investments. Hopefully, by the time you’ve sold some or all of your fixed income assets, your equity investments will have recovered. You can then sell off some to replace your fixed income assets so they are ready to come into play during the next stock market downturn.
Pension Pot Protection Strategies If You Are Approaching Retirement
For anyone not yet drawing down from their pension pot but approaching retirement and the moment they do plan to start taking an income from investments, what’s the best approach? You may well be concerned you pension pot investments may not have time to recover in value before you need to start locking in losses by selling them for an income.
In this situation it’s important to take well-informed decisions as they could well effect the long term level of your retirement income. If you are not entirely confident what the best approach is, take professional advice. It could make a real difference and at the very least offer you some peace of mind.
Take Stock Of Your Pension Pot’s Allocation
Everything already mentioned for pension investors already in drawdown applies to those approaching retirement and drawdown but not there yet. If you have already rebalanced your asset allocation to include more fixed income investments and cash, you should have little to worry about. Those should see you through until such time as other assets recover in value.
But if that’s not the case, there are still positive steps you can take. With a bit of luck, you could even see your pension pot come out of this stronger, boosting your retirement funds.
This may sound extreme but if it is an option, delaying a planned imminent retirement may be worth at least considering if you don’t have any cash or fixed income investments and would be obliged to relatively quickly start selling off equity investments. Lots of people are starting to gradually ease into retirement by reducing the number of hours worked rather than moving straight from full employment to full retirement.
A phased transition can not only be good in terms of easing yourself into a new lifestyle. If you are worried about having to cash in your investments before their value has had a chance to recover, delaying or phasing retirement could be a weight off your mind.
Avoid Taking Out A Lump Sum
If you are entering retirement in the very near future and had planned to draw down a lump sum to fund your first year or so of retirement, it’s probably a good idea to reconsider that. If you have other options such as cash savings it’s probably wise to use those first before locking in losses on pension investments.
If you do need to take cash out of your pension pot, rather than withdrawing a lump sum, why not instead make monthly withdrawals? Hopefully in a few months markets will be moving back in a positive direction and losses crystalised by withdrawing in later months will be less than now.
If You Can – Invest More
If you are approaching retirement and have the financial possibility to up your pension investments, now could be a great moment to boost your pot’s overall value. The market will recover at some point, hopefully early predictions of a ‘V’ or ‘U’-shaped recession will prove accurate, and when it does investments bought now at cheaper prices should see good returns.
Phase Annuities & Shop Around
Investors planning to use their pension pot to buy an annuity offering guaranteed income, would probably be best to hold off doing so right now if possible. If your pension pot has a lower value now, which it probably does, you’ll get lower offers than you would have done a couple of months ago.
If you do want to go ahead and lock in an annuity income, you could do so by only using part of your pot to buy an annuity now and the rest in phases when markets have recovered. Also never accept the first annuity offer made by your pension provider. Always shop around to see what the best offers are.
Pension Pot Protection Strategies If You Are A Long Way From Retirement
For those still a long way away from retirement and the point they may want to start drawing down an income from their pension pot, the current situation can be viewed positively. At least for those lucky enough not to have employment or income worries.
Wait For The Storm To Pass
If you have a well balanced portfolio you really shouldn’t have anything to worry about. You don’t need to sell any investments so just sit back and wait for the stock market to recover – which eventually it almost certainly will. At least based on historical evidence, the only question is whether that will take months or years.
Increase Your Investments
If you can, the best thing you can probably do right now is to put more than ever into stock market investments. Prices are 30%-ish down on where they were just a couple of months ago. They may well drop even more. Investing now and then riding the recovery could be the best returns you’ll ever make over a period of several months to years.
While investing, try to avoid over-trading or trying to time the market. Don’t buy in and out of shares in the hope of making quick profits by taking advantage of market volatility. The chances are you’ll spend more in trading costs than you’ll make in returns. If you do earn returns. Trying to time the market is always unadvisable.
Which is also why you would be wise not to hold onto any investment funds in the hope of timing the bottom of the market and maximising returns during the recovery. Your chances of getting the timing right are very slim. Instead, drip feed investments every week, fortnight or month. That way you guarantee at least some of your money will be invested at and close to the optimal moment.
Learn The Lessons Of This Market Downturn
Another positive way of looking at things, and taking advantage of what is currently happening, is for investors a long way from retirement to learn their lesson now from a safe distance. You are lucky you don’t have to cash in pension pot investments for an income now. You can wait out the recovery.
But it is a fantastic lesson as to why, when you do start to approach retirement, you should rebalance your pension pot more towards a cash allocation and fixed income assets like bonds. Nobody saw the Covid-19 pandemic, and its economic consequences, coming. But pension investors drawing down who have cash and fixed income assets they can cash in now, while staying invested in assets that have lost value until the recovery kicks in, are in a much stronger position than peers who entered the market downturn fully invested in equities.
Make sure you don’t forget the unexpected can always happen and in years to come rebalance your pension pot so you are protected against any downturn that does strike when you will need to draw down an income.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.