New Covid rules bring need to study finances – and sooner rather than later
IT’S been more than half a year since the start of the Uk-wide lockdown imposed as a result of the coronavirus pandemic and unfortunately, we face a period of more rather than fewer restrictions in the months ahead.
The pandemic has undoubtedly had an impact on not just the population’s health, but also on the finances of people across the breadth of the wealth spectrum in Scotland.
Many have found themselves facing financial difficulty as a result of furlough, redundancy, or difficult business conditions. But others have actually been able to save more during lockdown because they’ve been spending less on their daily commute, leisure activities or foreign holidays.
Those invested in the stock market have also had a turbulent ride, and there are particular challenges here for those approaching retirement.
Many Scots will find themselves understandably focusing on the here and now when it comes to their finances, particularly those hit hardest financially by the pandemic.
For others, the ability to put even a little extra aside on a regular basis could be a big help towards achieving future goals. And regardless of each of our situations, six months on from the start of lockdown is a good time to take stock of finances and think ahead to what we want our financial futures to look like.
For many, this will include thinking about future plans for retirement, whether it’s gradually reducing working hours, using private pensions to plug the gap before the state pension kicks in, having a little extra to enjoy with family and loved ones or a return to foreign travel, coronavirus permitting.
During lockdown, Aegon carried out some research and found the impact on people’s finances was starkly divided.
More than a quarter (27 per cent) of those in Scotland said that they had been able to increase the amount they save since the start of the pandemic, while worryingly 22% admitted that they have either decreased or stopped saving completely.
Those in the fortunate position of having been able to save more had been able to increase their monthly savings by an average of £145. So, after six months of extra ‘lockdown’ cash being added to their bank balance, now may be a good time to review future savings and investments.
It’s worth considering that if you’re sitting on excess cash that you have no immediate need for,
that money is earning little or no interest. Thinking about the long-term, investing some of this into either a stocks and shares ISA or a pension could make a significant difference to future investment returns.
And if you’ve got into the habit of saving more, keeping this up by increasing your regular pension contributions could really boost your retirement prospects.
What’s more, the younger you start, the bigger the difference. For example, for someone aged 30 putting an extra £100 a month towards a pension, this could mean they benefit from a £83,000 boost to their pension pot by the time they retire.
Those in their 40s or 50s could also see a big difference. And as an extra bonus, tax relief means that an extra £100 would cost you £80 from take home pay if you’re a basic rate taxpayer.
Our research unsurprisingly shows that those who have been furloughed and the self-employed have been hardest hit financially as a result of
lockdown, with these two groups most likely to have had to cut savings or increase borrowing.
While for many the future may continue to look uncertain, taking stock of finances sooner rather than later can also help for the future.
Both turbulence in the stock market and the lower market levels we’re now seeing compared to pre-pandemic will no doubt be concerning for individuals whose pension savings are invested partly or fully in the stock market.
Many will have seen their retirement pots fall sharply and despite markets partly bouncing back, there is still much uncertainty.
Fortunately, most members of workplace pensions will be invested in the scheme’s default fund which typically reduces the exposure to stocks and shares as an individual approaches their planned retirement age, so it’s worth checking how you’ve been affected.
If you’re, say, three years away from retirement, it’s very difficult to know what will happen to the stock market between now and when you stop working. If you move out of stocks and shares into safer investments such as gilts, you may limit future losses but also lose the possibility of future gains if stock markets recover.
If you’re even closer to retiring and are considering buying an annuity, you face an additional challenge as the cut in bank base rates to 0.1% has meant annuity rates are also at an all time low.
The alternative is to keep your fund invested for the moment and ‘draw down’ the income you need each month, but before doing this, we’d recommend seeking advice.
If you find your financial position has been significantly affected, for better or for worse, it’s worth seeking help either from a professional financial adviser or from the Government sponsored Money and Pensions Service which offers free money guidance.
Many Scots will find themselves understandably focusing on the here and now
Steven Cameron is pensions director at Aegon