Maria Nazarova-Doyle, Head of Pension Investments
In addition to the worries and disruption that the coronavirus has brought to us all, it also had a dramatic effect on investment markets, as shares and bonds across the world declined sharply in March of 2020. Markets have since largely recovered, but it was a reminder that volatility in investment markets can seem sudden and even distressing.
If you are a saver in the Scottish Widows PIAs through your workplace pension, your policy will likely be invested in funds that hold shares and bonds. The same types of investments are used in all the Pension Investment Approaches, but in different proportions at different times.
At any given time, the current value of your policy can go up or down during times of market turbulence. We know this is worrying. But it’s important to know that the impact on your policy will be different, depending on where you are in your retirement journey. Those further away from retirement will have more of their investments in shares, and those closer to retirement will have a higher percentage in bonds.
Let’s look at the impact on the 3 stages of pension saving.
Saving for retirement: Also known as the growth phase, when you are actively contributing to your pension. This phase starts when you start making pension contributions and lasts until 15 years before your selected retirement date, approximately age 50. During this phase, policies which are invested in a PIA have a higher percentage in shares. These are considered higher risk, but over the long-term, historically provide higher potential for growth. At this stage of your journey, you have more time – decades, in most cases – to recover from short-term market downturns.
Approaching retirement: As you begin to get closer to retirement, usually after you turn 50, we begin what’s called the de-risking stage in the PIA. That means that we begin to move you into funds with a higher percentage of bonds, which are considered lower-risk investments. As you have less time towards your selected retirement age, your policy won’t have as much time to recover from any market turbulence. Although de-risking reduces the growth potential of your plan, it also aims to help protect its value as you near your selected retirement date.
Taking your money at retirement: Five years from your selected retirement date we will start to automatically adjust your plan, depending on how you decide to take out your retirement savings.
Within our PIA offering, you can choose one of three ways to use your savings:
- Annuity Purchase – buying an annuity with your pension pot provides a guaranteed income in retirement. The insurance company will pay you a guaranteed income for the rest of your life which removes concern about future stock market performance. If your policy is invested to target an annuity, the funds it invests in will generally move in line with annuity rates but extreme market events could negatively impact this. The timing of annuity purchase is therefore important. Annuity rates are at a near record low just now, partially linked to the current environment which has led to historically low interest rates. Fund values may have been impacted negatively by the current crisis – so it might be worth delaying this decision.
- Cash (“encashment”) – taking all (or part of) a pension pot as a cash lump sum, 25% of which will be tax-free with the remainder subject to tax. Savers targeting cash should see the value of their savings sufficiently cushioned during market falls, but they would also miss out on any upside if markets go up. These types of funds are not designed for long-term investment as they have very limited potential for growth, which might not keep up with increases in the cost of living. This would actually reduce your future buying power.
- Flexible Access – keeping your pension pot invested and then taking income as it is needed. This is also called drawdown. If you are targeting taking withdrawals from your savings via drawdown or are already in drawdown, during times of extreme market events the value of your savings would be expected to go down. The more you take out, the less opportunity your savings will have to increase in value when markets recover as you’ll have a smaller amount invested during times when market values go up. If you haven’t started drawing income yet, it may be worth considering the timing of accessing your savings. And if you are already drawing income, you might wish to review the amounts you’re taking out. This area could be rather complicated so we would recommend you seek financial advice if you are unsure of what the current market volatility means to you.
Keeping you informed
While we can’t give you specific financial advice, our website contains important news and updates on the topics such as investment markets, avoiding pension scams, and where to find independent advice and guidance.
We’ve also created a video series entitled “Investing in Volatility”. The videos explain what market volatility is, and what options you have, should you wish to make any changes.
Please be assured that all of us on the investment team here at Scottish Widows, along with our strategic investment partners, are working hard to monitor developments and keep you informed.