The global economy is expected to shrink by 3.0% during 2020 as the world comes to terms with the impact of coronavirus, causing an economic downturn. This will mark the steepest downturn since the Great Depression of the 1930s, the International Monetary Fund said in April.
There seems to be no getting past that now and as political commentators keep reminding us, we’re all in this together. That may be true, but we will not be all in it together, equally. Some people will suffer through a loss of life, income, future prospects and the myriad of knock-on effects caused by the coronavirus. Others will find opportunity in the inevitable re-shaping of the economy and undervalued investments will come good for investors who have spotted a bargain. There are some rules that everyone can follow though.
1. Penny Savings
Our ‘normal’ lives mean we’ve set our finances up to pay for cars, gym memberships and insurance policies, for example. Examine whether there is any wiggle room in the way these debits have been set up to free cash in the age of isolation and social distancing. Admiral, the car insurer has recently refunded some customers for their premiums as the risk of claims has plummeted due to coronavirus[i].
If you have more time on your hands, review your household bills to see if there are any savings to be made there and challenge your existing providers who don’t give you the same offers that are available to new customers. If you can’t get anywhere, consider uSwitch to move providers to a better deal.
If you have a mortgage and you’ve been affected by coronavirus, speak to your lender about your mortgage holiday options. Just be aware that without agreement from your lender, your home may be repossessed if you do not keep up repayments on your mortgage
2. Get your financial protection in place
Financial advisers will tell you that protection is just as important, perhaps more so, than investment success for hitting financial goals. If you can weather the unexpected then it means you don’t need to disrupt other areas of your plan to pay for them.
Products like income protection insurance can support you and your family if you find yourself out of work for a period of time. Unfortunately, getting back into the labour market is likely to be tougher in a downturn so it makes sense to get this cover in place. If you already have it, you should check with your adviser to make sure the cover is adequate and you’re getting the best deal. If you’ve recently moved jobs or changed your mortgage, this is a good time to check.
We’ve covered some of the most common coronavirus insurance questions in our protection Q&A
3. Stay invested
Related to the protection point, is the need to stay invested in the market and avoid cashing investments for short term funds. If you can afford to leave your investments in the market, previous performance tells us there’s a good chance (not guaranteed of course) that your investments will recover in the long run. If you pull money out now, you will crystallise losses and if you decide to re-enter the market at a later date, there’s a chance you could miss out on any potential gains.
4. Don’t look at your pension as a short-term cash boost
The Association of British Insurers (ABI) recently warned people not to dip into their pensions for a bit of cash as it will impair their ability to fund their retirement, not to mention the possibility of paying unnecessary tax on withdrawals and impact ability to claim means tested benefits. One of the key advantages of a long term investment, like pensions, is compound interest and if you stop contributions, not only are you taxed at your marginal rate on that income but you lose the long term benefit of your compound interest working for you. It’s a double-whammy of a hit that will land several years down the line.
5. Don’t just take an annuity with your current provider.
Recently, annuity rates have plummeted. Since the start of 2020 annuity rates have fallen about 6 per cent, according to Moneyfacts, a data analysis company. For a 65-year-old using a £50,000 pot to buy a joint-life level annuity, the best rate available is £1,962 a year. At the beginning of 2020 that £50,000 would have secured an annual income of £2,080. A year ago it would have bought £2,265.
This drop means you might want to consider delaying drawing your pension to build up further savings or to wait for a more opportune moment to purchase an annuity. Regardless of your situation, you should get independent financial advice to check that you want to buy an annuity at all – you may find flexible drawdown is a better solution, for example.
Even if you do find that an annuity is what you want, you can get one from anywhere in the annuity market. An IFA will compare providers and recommend a solution that best fits your situation and retirement aspirations and ensure the rest of your finances are working to support your overall retirement goals.
6. Maximise your personal allowances
If you’re looking to shore up your finances, it makes sense to check that you’re not paying more tax than you need to. Maximising your pension and ISA allowances are always a good place to start (check out the 2020/21 personal allowances in our Tax Tables) and if you’re married, making use of your spouse’s allowances can help keep cash in the household if you need it or in long term investments to provide for the future.
What to do next?
An independent financial adviser always considers the whole picture so it’s best to have a conversation about what your long-term goals are.