How To Get Your Pension Back On Track After COVID
Since the start of the pandemic in March 2020, many employees have seen their salaries reduced. Whilst some are seeing their pay returned to pre-pandemic rates, how will your pension be impacted by the virus?
Pensions are long-term investments in which investors save some money out of their income. This money is set aside to fund their lifestyle in later life. This may be when they no longer want to work or are too old to work.
Pension funding should always be a percentage of your income. It does not matter what the source of the income is: salary, bonus, interest, or dividends. However, when a major source of income is reduced, it is difficult to keep funding at the right level to hit your targets on time.
Making Up For Lost Time
With regular reviews of your retirement planning, the cost of making up any shortfall can be kept to manageable levels. The table below shows two scenarios. Both investors began the pandemic with the same amount, but Sarah continues to contribute towards her pension whilst John takes a contribution holiday for 12 months.
Note: Assumes constant growth rate of 6% per annum after charges.
From the table, you can see that for John to achieve the same result as Sarah he will need to contribute £1,090.80 per month, whilst Sarah will continue at £1,000. This means John will pay £8,700 more into his pension than Sarah as a result of his contribution holiday.
The alternative, which many people in the UK are now considering, is to delay retirement by a year or two. For many, this may not be an option. A recent Office for National Statistics (ONS) survey discovered as a demographic, the over 50’s, are more likely to have been furloughed under the UK Government scheme. Of those who have been furloughed, more than 50% expect to be made redundant when the furlough scheme ends.
Whilst the 16–24-year-old age group was hardest hit at the beginning of the pandemic, the over 50’s now hold the inauspicious privilege of having the highest unemployment rate. The number of over 50’s who are “economically inactive”, i.e., not looking for work, has more than doubled in the year to February 2021.
It is not all doom and gloom. For those within professions or scientific and technical roles the opportunity to work from home full time has extended their potential working lives. Before the pandemic 18-22% of people in these sectors worked from home. Now it is 30-35% and many expect to continue to work form home after the pandemic has passed.
Last year was a very volatile year for investment markets. However, those investors who remained focused on the long term were rewarded for their patience. As the adage goes, it is not timing the market but time in the market that generates the rewards.
Plan, Plan, Plan
Before investing it is important to know what you are seeking to achieve and by when. Once these questions are answered in detail, consider what may prevent you from achieving your objective. What can you do to limit these events? How would you react? Write the answers down. This is your ‘play-book. This is much better than any investment guru’s book because it is highly personal. By considering these factors when they are theoretical, you will have a rational response if they do occur. For example, what would you do if your pension fund dropped by 25%? If you received a bonus, how much would you put towards your retirement? Having decided on the right thing to do in the cold light of day, you will be less likely to make a bad decision during the term of the investment.
The size of your pension fund will be determined by three factors: the amount you invest, the performance you achieve, and the charges associated with the investment. By regularly reviewing your progress towards your goals you are more likely to accomplish what you set out to achieve.
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