What are the implications of the coronavirus outbreak on people like me who have a significant sum invested in the FTSE 100 via their pension?

Paul

The most important thing to do in the face of what is an unexpected and uncertain period for investors is not panic. We have seen extremely volatile stock markets in recent weeks and it is impossible to say when markets will recover.

While fear and worry is understandable – particularly as the outbreak led to the biggest daily drop in the FTSE 100 since the financial crisis – if you are saving in a pension you should be thinking in terms of decades rather than months or even years.

At most, those building a retirement fund should use this as an opportunity to review their investments and make sure they are happy with the risks they are taking. Recent events also highlight the importance of diversifying your investments across different assets and countries, so you aren’t a hostage to fortune of one region or industry.

But you should avoid trying to second-guess what is going to happen or making significant trades which will cost you money and may not have a positive impact on long-term performance. If anything this is just a timely reminder that markets can and will go down as well as up, particularly in the short-term.

RETIREMENT INCOME RISKS

If we see a protracted period of negative investment returns, perhaps those most affected will be people taking an income from their pension pot through drawdown.

Anyone taking a significant withdrawal from their pension while also taking a hit on their underlying investments will struggle to make the money back, meaning they may have to reduce their income now or face the prospect of running out of money sooner than expected.

Again, there is no need to panic – at this stage we do not know what the long-term implications of coronavirus could be. That said, anyone in drawdown should review their investments and withdrawals to make sure they aren’t risking retirement ruin.

As a very rough guide, a withdrawal rate of more than 4% for a 65-year-old – so £4,000 a year from a £100,000 fund – is generally viewed as potentially unsustainable.

If you are thinking of securing an income by purchasing an annuity, the recent volatility shows the importance of gradually reducing the risk in your portfolio as you approach your expected purchase date. Doing this provides greater certainty over the secured income you can expect to generate from your fund.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual portfolios.

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