PROTECTING MY FAMILY

Don't panic: we're here to help

  • 18 May 2020
  • 10 mins
  • The coronavirus is predicted to plunge the economy into a deep recession.[1]

  • Normal income could be at risk and you may be tempted to turn to your savings and investments to tide you over.

  • But cashing in now could adversely affect your financial future.

  • Don’t panic: help could be on hand

Businesses are on a hiatus, many workers are having to cool their heels, and income streams are diminishing or ceasing. In these circumstances, it is understandable that people could be tempted to raid their savings and investments to fund their immediate living expenses. After all, the oldest rationale for putting some money to one side is to provide for “a rainy day”. And right now, an economic gale is blowing and the financial floodwaters are lapping at millions of front doors. How much rainier can it get?

It’s natural to focus on the gains

Panic selling assets for which you have worked and saved, such as a pension or a long-term savings plan, risks three highly undesirable long-term impacts:

  • Your tax position: accessing a large amount of accumulated wealth in a short time could push up the total of what you may owe Her Majesty's Revenue & Customs (HMRC).

  • You risk selling at the bottom: the FTSE 100 Index has lost about 25% of its value in the first three months of this year. [2]

  • Your long-term prospects: savings and investments are generally made with an eye to financial security in the future. But your assets can be sold only once, and when they are gone they are gone for good.

Let’s take these one by one.

A taxing question

First, it would be only natural to seek to sell any assets that have held their value or even show a gain on the purchase price, but if the profit exceeds the current Capital Gains Tax (CGT) allowance of £12,300 for 2020-2021 [3], then you will be liable to pay tax on your gains.

It may seem counter-intuitive, but selling assets at a loss can improve your CGT position [4]. Not only does a loss in the current year reduce your immediate CGT liability, it can reduce your tax bill in the future. According to HMRC’s website: “If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.”

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

You should also avoid the temptation to cash in your personal pension to provide cash now. Here, too, unwelcome tax events can be triggered by the indiscriminate accessing of retirement plans.

Most obviously, if you are under 55 years of age, withdrawals from your pension pot will attract a stiff tax rate of, appropriately enough, 55% [5].

If you are over the age of 55, then you have the ability to access 25% of your personal pension savings tax free. But cashing in your entire pot in one go is quite likely to push up the marginal rate of tax that is charged on the remaining 75%. HMRC warns: “You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.” [6]

Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Don’t stampede for the exits

Second, there is the inadvisability of selling assets in the current climate. Those fearful of the more apocalyptic scenarios that are doing the rounds may be tempted to cash out at whatever price they can get. But cooler heads counsel firmly against this course of action.

Read more: Common mistakes investors make

Professional investors would caution against stampeding for the exits when everyone else appears to be doing the same.

Remember: investing is a long-term activity – for at least 10 years – and we should always focus on our long-term goals and objectives. For while the coronavirus is likely to continue rattling markets, we should remember that variability in asset prices is normal and when markets recover they often rebound fairly quickly.

Watch: Help! I’m scared to invest

Read more: I fear losing all my money

Intelligent planning is likely to yield a more satisfactory result than panic selling.

Panic-free advice

Then, there is the potential for impact on your future income from selling assets today. This will vary from person to person, but the dangers of taking the 25% tax-free lump sum from a pension pot were flagged up in April by Paul Davies, principal researcher at Which? He warned that this may not be the best option if you think you might run out of money in retirement, you want a regular, guaranteed income for life, and you still want the potential benefits of future growth. [7] This is probably true for quite a lot of us.

So, if panic selling of assets is to be strongly avoided, what can the anxious and perplexed individual do?

Now could be a good time to consider taking professional financial advice. A financial adviser could look at your overall situation – including your debts, finances, investments and protection policies – and recommend some positive actions that could help you both today and in the future.

This could include:

  • checking existing insurance policies to see if they contain clauses that could protect against loss of income, or cover your mortgage payments.

  • drawing up an emergency budget to help you through the immediate future.

  • highlighting potential official schemes designed to help you through this crisis.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Sources:

[1] https://www.dailymail.co.uk/news/article-8200837/Coronavirus-spark-deepest-economic-recession-lifetimes.html

[2] https://www.which.co.uk/news/2020/04/coronavirus-how-to-protect-your-investment-portfolio/

[3] https://www.gov.uk/capital-gains-tax/allowances

[4] https://www.gov.uk/capital-gains-tax/losses

[5] https://www.gov.uk/tax-on-pension/higher-tax-on-unauthorised-payments

[6] https://www.gov.uk/tax-on-pension/tax-free

[7] https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/should-i-take-a-lump-sum-from-my-pension-a7ch15b2sgly#headline_7

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