In your 20s and want to give your pension a post-coronavirus lockdown health check? Here’s what you need to look at
- Younger savers were less affected than older ones by stock market falls this year
- But they could be hit much harder if they are forced to cut back savings
- Should investors alter their contributions or try to cash in on the boom in US tech stocks? We offer some suggestions on how to check in on your pot
You’ve almost certainly had more pressing things on your mind than your pension over the last five-and-a-half months.
But as summer turns to September and the government prepares to turn off the furlough taps and withdraw its other coronavirus support schemes – and mortgage and credit card payment holidays come to an end – it’s time to start seriously thinking about your finances again.
And for young people in their 20s and 30s, your pension is a key part of that.
Looking ahead: It’s time to give your pension a health check
Because although in some cases you’ll have 30 years or more before you can actually take it – by which point the world will hopefully have dealt with the coronavirus – the sooner you start to consider it the less of a problem it’ll be when you’re due to retire.
And in some ways younger pension savers have got off more lightly from the coronavirus-induced economic crisis.
Global stock markets, in which your pension savings are usually invested to generate enough of a return to build you a substantial retirement pot, plummeted earlier this year but have since recovered to a degree.
Younger savers have benefited most from this, because their pension funds tend to be more exposed to higher risk assets like shares, according to the pension adviser Isio.
It found savers more than 30 years from retirement saw their pension pot rebound 15 per cent between April and June, while those in their 60s saw theirs increase by 9 per cent.
And the pensions consultant Hymans Robertson estimated a saver aged 25 had seen ‘no material change’ to their retirement prospects as a result of recent market turmoil, largely due to the fact that stock market instability should smooth out over the several decades in which you’re saving into your pension.
But just because your pot may have been unaffected, your life may not have been, especially if you have had to take a pay cut or are facing redundancy. And even if it hasn’t, it’s still a good idea to give your pension a post-coronavirus lockdown check-up.
Here are a couple of things to consider.
How much is in your pot and how much are you saving?
Largely due to the success of auto-enrolment, whereby your employer deducts pension contributions from your pay provided you’re 22 and earning at least £10,000, record numbers of people are now pension savers.
But it isn’t much good to save into one if you aren’t going to save enough or if you don’t even know much you’re putting away.
Who pays what? How pension contributions stack up under auto-enrolment schemes (Source: The Pensions Advisory Service)
Close to three quarters of people are not sure how much is being saved into their pension, according to Robert Cochran, senior retirement expert at pension provider Scottish Widows.
You can work out how much is being contributed each month by looking at your payslips, and you can see the value of your pot by tracking down your workplace pension details and looking at your pension savings.
After that, it’s important to work out if what you’re saving each month is enough. For most, the legal minimum of 8 per cent of your gross pay, split between contributions by you, your employer and the government in the form of tax relief, is unlikely to be enough.
Fallout from coronavirus: Pension consultant Hymans Robertson found 25-year-olds had seen ‘no material change’ to their retirement prospects as a result of stock market falls this year, but a pay cut or cutting back on contributions could have a big impact
Scottish Widows recommend saving at least 12 per cent for an adequate retirement, which it said 51 per cent of 22 to 29-year-olds were doing last year. While nearly half were not, that is a rise of 21 percentage points in the last two years, suggesting more and more are upping their pension contributions.
Alternatively, rather than a percentage of your salary, you can estimate the income you think you’d need in retirement and then work backwards. You can use This is Money’s pensions calculator to help with this – see below.
And while savers for whom money is tight may look at cutting back their pension contributions as a simple way to free up more money, that could have serious long-term repercussions.
Hymans Robertson estimated a 25-year-old who cuts back their contributions from 10 per cent to the 8 per cent minimum could see their retirement income fall 16 per cent. Savers who can afford to do so, and are sure they don’t need the money in the short term, should therefore keep contributing.
‘It’s important to know how your long-term savings could be impacted based on changes you make now’, Kinna Patel, an associate consultant at Hymans Robertson, said.
‘If you are a younger investor, continuing to contribute and leaving your pension alone to grow over time is generally a good approach to take.’
One way around this can be seeing if you can get your employer to contribute more, with some employers matching your own pension contributions if you increase them or even contributing twice as much.
Should you change your investments?
From record falls in the stock markets to the fact Apple was briefly worth more than all the companies in the FTSE 100, the last six months have been nothing if not noteworthy when it comes to investing.
This of course has had repercussions for your pension. Although, perhaps not that much.
Hymans Robertson stated a 25-year-old has seen ‘no material change’ to their potential retirement income.
And Isio’s analysis of 13 default pension funds from some of the largest providers around, including Aegon, Fidelity, Legal & General and Scottish Widows, found pot sizes increased by between 10.5 per cent and 19.9 per cent between April and June.
So, there could be a tendency to overthink things.
Number crunching: Pensions adviser Isio found younger savers benefited most from the recovery in the stock market between April and June
‘The coronavirus crisis is significant, but there is a tendency for people to overplay the importance of events on the long term,’ said Adrian Lowcock, head of personal investing at Willis Owen.
He cautioned against focusing on short-term trends like the recent boom in US tech stocks.
‘The expectation is that things will not go back to normal and it’s all different now. However, history shows that people adapt and return to a new normal, which doesn’t look that much different from the old normal.’
There is no reason not to diversify beyond the standard default fund you are usually automatically invested into as part of a workplace pension if you feel you want to, but you should always do your research beforehand.
And although those funds have recovered somewhat, you should be careful about crystallising any investment losses if you sell off any holdings while the fund remains below where it was in March.
Should you take financial advice?
People in their 20s and 30s are not the stereotypical clients of financial advisers. A survey of 3,000 people by Hodge Bank found only a fifth of people under 35 had sought financial advice, with 70 per cent having sought guidance from family and friends instead.
And even in the midst of the coronavirus crisis, just 4 per cent consulted an adviser for the first time, according to a survey in June by the pension firm Aegon.
While some may think doing so embroils you in a lifetime of fees, there is the possibility of getting one-off financial advice, if you want some help with your pension, or anything else.
This is Money covered the issue of one-off financial advice and how much it might cost last June, and you can read about it here.
The default fund offered by This is Money’s pension provider, for example, is still lower than where it was.
Adrian added: ‘When reviewing the performance of your portfolio it is very easy to just ditch poor performing investments and put that down to experience. However, there are so many reasons for an investment to underperform and that doesn’t mean it will continue to underperform in the future.’
And if you are looking to diversify beyond the basic offering aimed at all investors, because of the decades you have until retirement, you may be looking for something which offers a potentially higher return in the future, even if there is more instability over the short-term.
‘The advantage of being younger is that you are likely to be making more contributions to your pension through the years, so can add more money and benefit from different opportunities, but particularly from when markets are weaker you can put money to work’, Adrian said.
‘It also means that the money you have in your pension is probably less than the money you are going to be adding, and therefore the risks you are taking are not as great as someone in their 60s who is nearly fully invested.’