For financial professionals only
Consequences of Covid: the impact on generations
The coronavirus outbreak has drawn stark lines between generations. Older people are categorised amongst the most vulnerable, and many are suffering loss, ill-health, and loneliness. But the impact of the virus has been felt strongly across other age groups, too. And the true costs to the economy, society and our future generations will only be known in time.
In this series, we will explore the likely long-term financial impact for people at different stages of life, and where their advice needs will lie in years to come.
Will the impact of lockdown be felt in our pension pots?
The pandemic has caused huge disruption in UK employment – from home working to furloughed staff, and ultimately a rise in unemployment, with some 750,0001 losing their jobs in the crisis. With pension accumulation so intrinsically linked to the world of work, it’s crucial to factor in the impact this will have on the nation’s pensions.
Fallout from furlough
Though pension contributions have continued for all furloughed individuals (whether employed or freelance), the rate will be on their reduced pay, meaning a lower amount has been paid in. This still represents 80% of their normal contributions, but with the cap on support at £2,500 per month, those used to earning more than this have seen a significant drop in their income and pension contributions.
There’s also the risk that those on a reduced income will seek to cut costs elsewhere – and the relatively “invisible” immediate benefits of pension contributions may seem an attractive place to start. Data from Canada Life last week has shown 1 in 10 workers have stopped their pension contributions2. If individuals have opted out of their workplace pension, they stand to lose their matched employer contributions, as well as the tax relief that usually applies.
Ramifications of redundancy
With the complete break in revenue, many companies have already announced cuts to employment, and as the furlough scheme draws to a close, it feels inevitable that further redundancies will follow. Unemployment is a frightening prospect at the best of times, but money worries are likely to be even greater for those who’ve taken advantage of mortgage holidays, thinking the crisis represented a temporary, rather than permanent, change to their earnings.
While unemployed, those solely dependent on workplace pension schemes won’t be making contributions and are unlikely to consider the long-term impact a break from payments into their pension pot will make. That’s nothing said of the potential effect on their state pension entitlement either, if time out of work means they fall short of the required National Insurance contributions.
Compensating for a cut in contributions
While many of your clients, current and prospective, will have seen a reduction in their pension contributions and may struggle to make up the shortfall, they can take steps to minimise the impact with good advice.
For those who’ve opted out of a workplace pension scheme or reduced their contributions due to affordability concerns, they don’t need to wait until their company’s next re-enrolment date to opt back in. They can do so at any time.
Even while not earning, pension contributions can be maintained at a level of up to £2,880, meaning a sum of up to £3,600 would be paid into a pension scheme with tax relief. While this may not sound like a huge amount, if affordable, and after compounding, it could make a huge difference in retirement. Alternatively, personal pension contribution allowances can also be carried forward – so if a client can’t maximise their contributions this year, they might consider an additional contribution in the future to make up for it.
Similarly, clients who haven’t sought benefits during periods of unemployment could later top up any gaps in their NICs through voluntary payments to ensure they qualify for the maximum state pension on retirement. This route to secure future income may also be attractive to self-employed clients who don’t pay Class 2 due to small profits.3
Finally, the current climate could prove a sensible time to review the adequacy of your client’s insurance to ensure it covers their income requirements in the event of illness or other interruption.
References
[1] FT.com 2020. UK sheds nearly 750,000 jobs during coronavirus crisis – 2020 [online] Available at: https://www.ft.com/content/c8ef84bf-0539-4281-b353-d5b840d10b5e [Accessed 30 September 2020].
[2] Thisismoney.co.uk 2020. One in 10 workers freeze pension saving during the Covid-19 crisis, risking the loss of tens of thousands from retirement pots – 2020 [online] Available at: https://www.thisismoney.co.uk/money/pensions/article-8719099/One-10-workers-freeze-pension-saving-Covid-19-crisis.html [Accessed 30 September 2020].
[3] Gov.uk 2020. Voluntary National Insurance – 2020 [online] Available at: https://www.gov.uk/voluntary-national-insurance-contributions [Accessed 30 September 2020].
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.