Special episode: How coronavirus might impact your retirement income
Shirley: Hello, I’m Shirley Ballas, and welcome to Rewirement, the retirement podcast from Legal and General. We’d always planned to launch our series today, but whilst we’ve been recording, just like everyone else, we’ve had to find new ways of doing things with the Coronavirus outbreak. In our new series we’ll still be exploring what it means to retire in today’s world, and how this can be an opportunity to reset, reinvent and rewire.
Planning for retirement is a long-term gain with great rewards at the end of it and making the move from work to retirement is not something anyone likes to do with a bump. But, for many, the current Coronavirus pandemic has caused uncertainty and raised unexpected questions. There have been plenty of headlines about changes in the stock market and pension values, but it’s time to cut through the worry and take a measured look at what really is going on.
I want to help you feel in control of the future and put your mind, and mine, at rest. So, we’ve made this special episode to help you deal with the urgent questions many of you are asking. I’m joined the experts from Legal and General, we have Chris Knight, CEO of Retail Retirement and Sarah McLeish, CEO of Financial Advice. And, Hollie McKay of Boring Money is here to make sense of it all too.
How are you all adapting to the situation?
Chris: As best we can, I think, yes.
Hollie: I’ve got two young children in the house, it’s the home school that’s driving me nuts.
Sarah: Yes, same here. I’ve a five and a seven-year-old at home so the school are doing a brilliant job. but, like every other family, you just have to do your best and multi-tasking across, you know, teaching, cleaning, running businesses, and I’ve started up a hairdressing salon now, as well, COVID Cuts we call it. And, it can’t last forever, eh.
Shirley: Chris and Sarah, before we get into all the detail, what’s your view to anyone looking at a change in their pension right now?
Chris: Well, Shirley, look, this Coronavirus has filled our life with a lot of, you know, uncertainty and angst. You know, people might have looked at their pension funds and seen a bit of a drop and that’s not a fun thing to have to do, obviously, not to have to see. And, you know, you might have quite a few different types of pension arrangements and you probably need to get them altogether in one place and have a look and see what they really are. Get all the facts, because some pensions come with really valuable important guarantees, for example, and you should really think through, take advice and get yourself informed on what to do with those especially.
You know, you don’t have to necessarily do anything. I’m not saying stop, but take your time, think about what’s important to you in your life and get yourself informed before you act. And, as we always say, you must shop around to get the best deal for yourselves.
Sarah: Yes. Well, I agree with Chris, I mean, pensions and most investments, for that matter, they’re designed for the long-term, for a marathon not a sprint. So, if you can postpone making any big decisions about your pension savings then that’s got to be a good thing. But, if you need to understand your options or access your pension more urgently, then I’d really recommend speaking to a financial advisor. If you don’t have one, ask your friends if anyone can recommend one or, failing that, visit unbiased.co.uk, which is a website that shows all of the regulated advisors in your local area.
Shirley: We’re being asked lots of questions around retirement planning at the moment. I’m going to sort these questions so we can talk about everyone’s different needs. We’ve got people asking questions who are post-retirement, people who are just about to retire, and people who are a little way off. Let’s quickly explain some of the terms we’re going to be discussing today. Chris, what are dividends, drawdowns and annuities?
Chris: Yes, thanks, Shirley, I mean, these things can all be a bit confusing to get separated out in one’s mind. Now, look, a dividend is generally an income that you receive if you’re the owner of a share in a company, equity, if you like. And, most companies pay their dividends out once or twice a year, and most companies aim, most of the time, to maintain those dividends, or even grow them over time. But, they’re not guaranteed, and the dividends can be cut or even stopped, and we’ve seen quite a lot of that from companies in this current crisis.
Now, a drawdown, that’s a bit different, that’s when you create income for yourself by drawing down money from your pension fund, usually that’s when you’re in retirement. And, there is great flexibility because you can drawdown, you know, how much you want when you want. But, of course, once you’ve drawn it, once it’s gone, it’s gone. With drawdown you usually benefit or peril from the ups and downs of the market and, obviously, when it’s up it’s good and it feels good. But, when it falls then the amount that you can take, or you might be able to take as future income from that pot as a future drawdown income can reduce, as well.
Annuity is usually an income that you buy from an insurance company. And, the most common type of annuity is one that pays you every month or every year for as long as you live. It’s not flexible, but it is guaranteed, it’s guaranteed both by the insurance company itself and there is a statutory back up guarantee behind that, as well. You can buy an annuity that pays an income to your family, your loved ones, even after you’ve passed away.
And, you can also get, what we call, fixed-term annuities, and that’s a product which pays an income for a period of time and then maybe a lump sum at the end. That is a bit more flexible with respect to, sort of, encashment options, and then you can change your mind and do something else with the money that you get at the end. So, hopefully, that’s a good separation of those three different important concepts.
Shirley: OK. Sarah, what are lifetime mortgages?
Sarah: Yes, so lifetime mortgages, a much-misunderstood term. Lifetime mortgages are a type of equity release. So, these are products that allow you to release tax free cash or equity from your home without having to move out of it. You can take that cash or that equity as one big lump sum, or you can take it as a series of lump sums as and when it suits you. So, you may wish to take one lump sum now to buy a new car, another lump sum in two- or three-years’ time to do up your kitchen and so on. And, with some of the products now on the market, you can also take that cash or equity as a monthly income. So, you could top up your monthly income by, say, £150/£200 a month.
These lifetime mortgages, or equity release schemes, they’re usually repaid form the sale of your home after the last borrower, or the last member of a couple or a household passes away or moves into a care home. And, at that point, the money that is owed is essentially the total amount of equity that you’ve released, plus any interest that you’ve built up, or rolled up, as we say, over the lifetime of that loan. These products, the good thing about them is that they now come with a very broad range of safeguards, and they have done, in fact, for many years. One of these is something called the No Negative Equity guarantee, and that means that you can never owe more money than the value of your property.
Shirley: And, just for my interest, what’s the percentage that they charge you when you equity release, so if you take money out of your house what’s generally the percentage you’re paying back?
Sarah: It varies hugely, the interest rates can vary according to your property value, the amount of money that you’re trying to release from it, which we call the loan to value ratio. But, on average, interest rates at the moment can be anywhere between 3-5%, so not dissimilar from a, kind of, standard residential mortgage.
Shirley: OK. Thank you. OK. That’s the jargon busted, let’s start with a few general questions. Hollie, you’re the CEO of the financial website Boring Money, you must be getting a lot of questions right now. If someone is strapped for cash because lockdown has resulted in them losing work, what should they prioritise first?
Hollie: Yes, Shirley. I mean, we’re getting loads of questions and there’s an unprecedented use of the word unprecedented at the moment. Really, at the risk of stating the bleeding obvious, if someone has lost their job and they’re strapped for cash the first thing to look at is cutting costs. There are some practical things we can all do, switching utility bills can save £200 a year. Checking your direct debts and your standing orders, these can really rack up and accumulate so go in and make sure you need all of those. Things like insurance renewals, you know, don’t just take the first deal you’re offered shop around.
The next thing is debt, you know, debt, I think my analogy is, it can be a bit like fat, you can have good debt and you can have bad debt. The bad debt the, sort of, saturated fat of the financial world, are things like payday loans, credit cards, store cards, those are typically things with really high interest rates, and we have to focus on paying those off first. You can explore transferring a credit card on a 0% plan, transferring that over.
The last thing is, obviously, mortgage holidays, there are many mortgage providers willing to talk to people and postpone or delay mortgage payments. So, those are the, sort of, most obvious areas I’d start.
Shirley: I’ve just learned a lot there. Should someone in that position stop paying into their pension for a while?
Hollie: They could. I mean, these are odd times and normally, Shirley, I would almost never suggest someone stops paying into the pension. Now, pensions are confusing and they’re full of jargon but, actually, what a pension gives you is some free money, and that doesn’t always come across. If you’re a basic rate taxpayer and you stick £80 into a pension the government will top that up by £20 and this is, sort of, quite often not so well understood. If you’re a higher rate taxpayer it can be even more.
So, I think turning your back on a pension, just because it’s full of jargon and it could feel a long time away, is quite often a bad move. What I would say, though, is we have to be practical, we can only spend the money we have coming in. And if, as I’ve mentioned before, there is that debt lurking, those bad debts, those expensive debts then, for heaven sakes, you know, we all have to prioritise getting rid of those first.
So, normally, I would hang onto the pension, you know, because it does give you a really good way to turbocharge your savings. But, if there is expensive debt, then we have to get rid of that first.
Shirley: What’s going on with company pension schemes, when employees are furloughed?
Hollie: Yes, this is another, sort of, confusing area. But, the bottom line is, if you’ve been furloughed your boss still has to pay your national insurance contributions and your pension contributions. Now, at the moment, if you’ve got a workplace pension, the law says that your employer has to pay 3% on what’s called your qualifying earnings. So, just to give you an indicator, if you’re earning £30,000 a year, then your boss will be paying in about £60 a month for you, so do check it out. But, it’s really important that people know that they are still entitled for those pension payments, even if they’ve been furloughed.
Shirley: As the stock market has gone down is now the time for people to be putting more into their pension pot if they can afford to?
Hollie: Yes. This one is really counterintuitive, it feels frightening at the moment but I always think, you know, when the Daily Mail splashes the headlines out there about stock markets crashing it’s, actually, a really good time to think about investing or to pay more into your pension. Now, it depends on timing, as always, I wouldn’t say that to someone in their nineties, they have very different timeframes to younger people.
But, my analogy here is, you know, when we’re investing in things for the long-term, when do we think about buying them? So, if you’re thinking about making an investment for your home, I kind of like Le Creuset cookware, it’s really lovely, but it’s horrendously expensive. Do you buy it when it’s full price or do you wait until January and buy it when it’s in the sale? And, in a way that’s how I think about the stock market.
At the moment there are some really brilliant brands out there that will recover from this, things will, kind of, come back to normal, and now is a chance to, sort of, invest more in your pension or your ISAs and get access to those investments when they’re on sale. So, don’t necessarily freak out when you see, sort of, headlines about lower stock markets, it can be a great time to access fantastic companies at lower prices.
Shirley: Let’s bring in Chris and Sarah with a few questions for those people who are approaching retirement age. Chris, for someone who is planning on retiring next year, should they be putting this off if the value of their pension fund has fallen?
Chris: Well, Shirley, I think there are perhaps two aspects to this, one is when people should stop working and retire, and the other one is when they might want to access their pension funds. So, on the first one, I know lots of people have been having mixed emotions about wanting to carry on. I’ve heard people who were intending never to retire have decided, no, actually, I’ve had enough of this I want to retire.
For many people working part time can be a really good option, and we can see lots more people doing this. You know, you can help boost your pension pot, you help your money go further, you’re not spending so much if you’re still working, so that can really work for some people.
So, the second part is when to access your pension pot. You know, it is scary when you see the headlines in the papers. People should just check their pension pots because they may not have fallen as much as they feared, especially if you’ve been in more of a life stage or life cycle fund, where they would have been in safer assets, not just in equity. So, people have lots of options and they should give themselves some time and space to consider those options before acting.
Shirley: With all this uncertainty would buying an annuity be a good or bad option at the moment?
Chris: Annuities can offer people, you know, real security and certainty in these times which is, obviously, very valuable. I think there is often a misconception here, you don’t have to take all your pension money and buy an annuity, you might just take a part of it and use that to generate income that, sort of, meets your essential spending requirements. And then, once you’ve done that, of course, you’ve met your essential spending requirements, you can be a bit, sort of, freer and easier with the money that you have left. And, we always say to people that they must shop around to make sure they get the best deal.
The other thing people perhaps don’t know is that, if you’re not in such great health then you can, actually, get a much better deal from an annuity provider, a much higher level of income, than if you were very healthy. And, some people think it’s, kind of, the other way around, but for annuities that’s how it works. So, particularly it’s important when you consider buying an annuity that you think about your health and you make sure you tell your advisor and the insurance provider about that, so you can actually get a great deal.
So, I think annuities, be they life time annuities for the rest of your life, or fixed term annuities for a period of time, they can be a really good option for at least part of your money if you shop around and make sure you get the best deal for yourself.
Shirley: Sarah, with returns on retirement plans being low at the moment, wouldn’t it be better to take your pension in cash and stick it in the bank?
Sarah: Well, Shirley, as Chris said earlier, when markets are uncertain there is a huge temptation to switch your money into cash, and that’s a very human reaction. But, of course, savings, deposit rates are at an all-time low at the moment with the Bank of England interest rates being at this new level. And, more importantly, there is, as we said earlier, a risk that you then lock in any potential losses that, at the moment, only really exist on paper or on a computer screen.
And, if you do lock in those losses, then you’ve foregone the opportunity to allow your investments any time to recover when markets go back up, as they eventually will. As we said earlier, pensions are designed for the long-term, they are designed as a long-term investment. But, if you do need to take money from your pension, if you do need to make that decision more urgently, then one thing I would say is, it’s really important to be up to speed with the tax rules on withdrawing money from a pension.
So, as most of us know, pensions allow you to take up to 25% of your pension pot tax free. If you have a pension pot of £100,000, say, you can take £25,000 of that with no tax bill whatsoever. But, the remaining £75,000 will be subject to tax at, what we call, your highest marginal rate, so that may be 20% if you’re a basic taxpayer, 40% or even 45%. The numbers are slightly different in Scotland, 21%, 41% and 46%. So, if you were to take a large amount, or even the whole amount of that pension pot, then you could face a much higher tax bill than if you simply took smaller amounts of a longer period. So, as always, really important to take advice and to understand those tax implications.
Shirley: That’s interesting, 25% tax free, but on the other 75% you’re taxed at whatever bracket you’re at right now, right. So, if I’m in a high tax bracket I have to pay that tax, so that comes off your pension pot, interesting.
Sarah: Absolutely. And, if you did have £100,000 and you took it all in one go, then that could push you into a higher tax bracket than you’ve, potentially, ever been in before, if you’ve always been a basic rate tax payer. So, quite a lot to think about and lots of great free sources of information out there, like Pensions Wise, that will explain more carefully.
Chris: And, Boring Money, as well.
Sarah: And, Boring Money, of course, of course.
Shirley: Sarah, if someone is in, say, their early sixties and has seen their income reduced due to the COVID-19 situation, and they now think they won’t be able to pay their mortgage off before they retire, is there anything they can do other than sell?
Sarah: Well, Shirley, what I would say is, to anybody who does find themselves in that situation, your first port of call should be your current mortgage provider. So, you will have seen in the news that mortgage providers are being asked by the government to provide mortgage payment holidays. So, speak to your mortgage provider, understand what relief is available to you before you do anything else.
The challenge, of course, with downsizing or selling up at the moment is, of course, that the housing market has ground to something of a halt. It will, of course, come back, but the timeline for buying and selling houses at the moment has extended considerably. So, if you are in that situation, if moving out isn’t an option for you at the moment, if you aren’t able to access some form of relief from your mortgage provider then, of course, equity release could be an option to consider.
There are also now some equity release products on the market where you can pay off the interest on these loans every month, so that it doesn’t build up over time, so it behaves rather like a traditional mortgage product. But, as the time lifetime mortgage suggests, these products are designed for a lifetime, they are designed for the long-term, so they should never be seen as short-term fixes or ways of getting yourself out of a short-term problem. They do require really careful consideration and they should always be taken alongside expert advice.
Shirley: Alright. Let’s talk about older homeowners, where do you stand if you’re planning on downsizing, the housing market is pretty much frozen at the moment, so these people can’t move any time soon?
Sarah: Again, Shirley, as we said with pensions, if you can ride this out, if you can wait, if you can postpone that big decision about downsizing, then that’s got to be the best thing to do. So, try and ride this out, wait until the housing market recovers and, if you do want to downsize, then try and postpone that decision if you possibly can.
Shirley: Now, moving onto some questions from people who have already retired. If someone is drawing their pension income through an investment portfolio their income will be affected as shares and dividends have fallen. Do people need to revisit their plans and the income they are taking from their pension pot?
Sarah: Yes, Shirley, now is absolutely the time to revisit those retirement plans, but perhaps not in the way that you think. What we often see is that, in times of uncertainty, people draw more income from their pension drawdown fund because they’re seeing their investments fluctuate. But, in fact, they should actually be doing the opposite. As we said earlier, it’s really important to allow your investments time to recover to avoid locking in some of those losses. And, as I also said before, it’s so important at this time to take really good advice, if you don’t have an advisor, as I said, do go to unbiased.co.uk to find a regulated advisor in your local area.
Shirley: It makes me feel really grateful for my financial advisor, by the way, just that it means so much. OK, absolutely. Hollie, anything you’d like to add there.
Hollie: I think the bottom line is, at the moment if you can avoid it try not to sell, try not to take money out of your pension. You know, is there any other cash you have that you can use, can you use your state pension, is there any other rental income, anything down the back of the sofa. Just anything you can do to try and not sell at the moment when prices are at rock bottom, because all you’re doing then is locking in losses. So, try and sit tight and look to other income sources if you possibly can.
Shirley: Now, let’s talk about people who are retired and bought and annuity with their pension funds. A lot of people choose this option because they want the security of a regular income, but is this likely to be affected too? Chris, what do you think?
Chris: Well, Shirley, this is quite an easy one to answer, if you have an annuity and you have an income coming through that is guaranteed, so that is the benefit. So, it doesn’t matter about the performance of the stock market or the performance of the financial markets or the economy, that money is guaranteed. And, that’s why we think for some people they are a great option in times of uncertainty like these.
Shirley: Nobody likes to think the worst, but some people have asked, what happens to pension payments from an annuity if they die?
Chris: Well, that’s a great question, yes, I agree, it’s not much of a fun topic to talk about, is it. I think people need to check with their providers, so if you’re receiving an annuity that’s come from a defined benefit, so maybe a company scheme, a pension scheme, often these come with, what’s called, spouse benefit. So, the pension does carry on, or maybe two thirds of the pension carries on after the, sort of, main pension owner, if you like, passes away, so it’s good to check and make sure you understand that.
If you have an individual annuity then, at the time you bought it, you would have chosen, there are various options that you can take. So, if you’re about to buy an annuity, you know, which is a perfectly sensible thing to be thinking about doing at this point, then you should be checking out what those options are. Many annuities you can buy with a spouse benefit, as I say, or that pays to your spouse, your children, or somebody else, annuity keeps paying part of the way, either a lump sum or for a period of time, and so that’s often an option that we would encourage people to consider.
Shirley: If someone is not quite at retirement age, but worries that something like Coronavirus could happen again, are they better off just putting their pension money into a savings account?
Chris: Well, this is a really difficult one. I guess, if you put your money into a savings account on about February 15th this year, you would now be feeling quite smug in that you’ve avoided all the losses. Normal wisdom, conventional wisdom in the market is that, over the long run having your money in a savings account isn’t the best thing to do. If you just think about inflation, for example, you know, savings account interest rates are very, very low, you know, 0.1% would be a good rate for a savings account at this point. Over time inflation does eat away at the value of that cash, so conventional wisdom says, not a savings account but, obviously, these are difficult times That’s not what I would be doing, but people have to make up their own minds and give good advice, as we always say.
Shirley: So, not in a savings account then where?
Chris: Well, I think if you’re brave, and Hollie was talking about this earlier, you could say, well, stock markets have fallen, this is a great buying opportunity. I think if you’re some years away from retirement that’s probably what you would do. As you get nearer to retirement then your pension provider, your savings scheme will have lots of different options that you could take a more balanced view of things. So, I think, if you’re in your fifties and early sixties then, again, personally, it’s a personal choice, I think a more balanced, slightly lower risk fund.
That’s something to do, actually, many providers you can go onto the website and get this, as well, help you, you know, have some questions, a quiz, if you like, to help you understand for yourself your risk appetite. You know, how do you feel when stock markets fall, does that really stress you out, are you likely then to fall into a trap that Hollie was talking about earlier, about selling when prices are low, rather than being able to hang on until things recover. So, that, sort of, risk appetite and risk tolerance is a very personal thing for people.
Shirley: Hollie, anything you’d like to add there?
Hollie: For me, I think when we think about risk we don’t like risk, we associate risk with doing silly things with bad outcomes for our family. And so, suddenly, when we’re in a financial environment and people talk to us about risk, a lot of us just turn our backs on it and say, that doesn’t sound like a good idea, I’ve worked hard for my money, I don’t want to take any risk.
But, it comes down to timeframes, Shirley, and for anyone that’s saving up for the future and has got more than ten years on their side, before they’re going to need their money, you know, why would you leave it sitting in cash when interests are at historic lows, your money is going backwards almost. So, you know, for me, if I’m talking to people, if they’ve got long timeframes on their hands, then I think, actually, it’s risky not to look at the stock market because you know your money is going to sit in cash and, frankly, do stuff all over the long-term. A technical term there, Chris, stuff all.
Chris: No, I agree with you. If you’re ten, 15, 20 years away from retirement I think I 100% agree with you. I think the challenge, really, is for people that are, you know, two, three, four years away from retirement. I think, first of all, as we’ve said, it may not be as bad as people fear from the headlines. When they look at their actual pension funds they may not have come down anywhere near as much because they may have been already in more of a balanced portfolio. But, for them, it’s what’s the right thing to do now, you’re feeling under pressure to do something, and helping people navigate through that to try and separate out what they can do, what they perhaps ought to avoid, is what we’re all about isn’t it. It’s what you’re about on your website, it’s what we’re all about.
Shirley: Hollie, some people are in a fortunate situation and have continued to work from home during lockdown, that has meant that they have saved quite a bit without paying for travel, not buying their morning coffee and lunch, no weekend outings. Should they use this money to pay some extra off their mortgage or top up their pension?
Hollie: This is a really hard question, Shirley, it’s a bit like asking, I think, who should win Strictly. And, by the way, I’m still outraged that Karim didn’t win last year. The answer is personal to you, it depends on circumstances, age, preference. But, if you think back to earlier I talked about financial good fat and bad fats, you know, mortgages are typically good fat, interest rates are very low, and they are a sensible part of someone’s financial plan.
Now, if you think about pensions, people have got to remember that when you pay in you get free extra top ups from the government. If you’re a basic rate taxpayer you pay in £80, Bing the Chancellor waves his magic wand and another £20 appears, so that’s extremely compelling. There are also contributions from your employer too. So, on balance, I’m in the pension camp, but, and there is always a but, that money is locked away. Once you pay it into a pension you can plead, weep and wail, but you cannot get that money out until you’re at least 55, so it comes with that but.
But, if you’ve got time on your side, then I would always typically favour a pension, just simply because you get those extra top ups from the government and you don’t often, Shirley, get free extra top ups from the government. I appreciate there are lots of terms and conditions and saying free money can be fraught with legal risk, I’m sure.
Shirley: I’m learning a lot. I want to thank you all, I can’t tell you, it’s just made me completely rethink, I’m turning 60 and you have made me rethink this whole project.
Chris: There you go, the secret to a happy life.
Shirley: Here’s hoping that’s answered a lot of the questions you have about the impact the current Coronavirus pandemic might have on your retirement. You can find out more about retirement planning at legalandgeneral.com/retirement. This episode was a special one-off, but this series, Rewirement, is all about helping you plan ahead and get the most out of retirement. So, although you might have more pressing day to day worries at the moment, hopefully, the tips and information in this podcast will help you focus on a brighter future ahead.
Next time we will be getting to know the inspiring Rewirees who are looking to the future and sharing their hopes for their later years. Subscribe on your podcast listening platform and make sure you don’t miss this.
I’m Shirley Ballas and I’ll catch up with you next time.
Planning for retirement is a long-term game, but for many the current coronavirus pandemic has caused uncertainty and raised unexpected questions. It’s time to cut through the worry and take a measured look at what’s really going on. In this special extra episode, join Shirley Ballas and her panel of experts, as they try to help you feel in control of the future, and deal with the urgent questions many of you are asking.
CEO of Legal & General Retail Retirement
Chris’ focus in the Retail Retirement division is helping individuals lead longer, healthier, happier lives. Together with his team they have helped over half a million customers to live their own ‘colourful retirements’ with a range of products and services including annuities, lifetime mortgages and care solutions.
CEO, Legal & General Financial Advice
Sara was appointed CEO of Legal & General Financial Advice last year. She is passionate about the role good financial advice can play, to help people make more informed decisions about how to utilise their assets as they enter and progress though retirement.
Sara joined Legal & General in 2018, having spent 13 years as a management consultant and Director with EY.
Founder of website Boring Money
Holly has worked in the investment industry for about 20 years. She set up Boring Money which is an independent business to help normal people who don’t have PhDs in finance make some smart investment decisions quickly and painlessly.