- Donald P McKenna
Pension Planning in the time of Covid-19
“What is impact of Covid-19 had on my fund values?”
“Is my pension still going to deliver what I hoped?”
“Should I still do an AVC in 2020?”
“Is it the wrong time to start a pension?”
These are just some of the pension related questions I have been receiving from clients over the past 6 months. Whether you’re just ready to start saving for your retirement, already have a pension or are trying to decide what to do with the self-employed tax deadline approaching, there is one common theme.
What is the impact that Covid-19 and the economic uncertainty it has brought both in Ireland and globally having on pension planning and investments?
The first point I will make is that it is never the wrong time to start a pension. The earlier you start planning for your retirement the better. It takes considerable time to build a pension fund and it should be a lifelong process. If you delay starting saving for your retirement, you could risk facing an expensive catch up game later in life. This focus can be challenging, given other financial pressures and considerations that a person may encounter but it should be the goal.
Younger savers who are thinking of starting their pension planning should also remember that there are generous tax reliefs on pension contributions. This makes a pension fund a very attractive method of saving for retirement. It really is about getting into the habit.
Another group of my clients would often consider availing of these tax reliefs in the form of a lump sum payment into an AVC at this time of the year. It is still good advice to do this. This provides an opportunity to review your portfolio. I recommend reviewing your pension annually to ensure it is still doing what you want it to do. You can easily opt for a cash fund or low risk fund in the initial stages of a top up, until markets stabilise. While this won’t provide significant returns, it will allow you to maximise your tax savings.
I have also had a number of meeting with people who are approaching retirement. They were worried that their investments had been eroded and that their pension would be of far less value than they were planning for. In the majority of cases, these people can rest assured that their pension investments are doing what they are designed to do.
This is because most pension products have a “lifestyle strategy”.
What this means is that in the early years, contributions are invested in riskier options. Although these tend to be more volatile i.e. the values go up and down, they do generate the best returns over the long term. However, as an individual approaches retirement (maybe 10 or so years to go), the investment is gradually switched into more conservative style funds. This locks in the gains to that time and limits exposure to market volatility.
At the start of the crisis fund values plummeted but there has been great ground recovered since then. Many of the usual commentators are assuring us that we are not back to where we were in the late 2000s. The conditions of this crash are very different and although a global recession is most probable, there is much being done to ensure this is short-lived.
Overall a pension investment is still an attractive offer, although it may take some years to see markets stabilise. My advice to clients is to review the stage of their pension planning and make informed decisions based on their age, life situation and financial goals.
If you need to discuss where your pension is at, please don’t hesitate to contact us.