Ellie Allen

The Financial Implications of the Coronavirus Pandemic and How You Can Protect Your Money


4 min read

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Opening an account with Currency Solutions is completely free and you’ll be able to make currency transfers anytime at our excellent exchange rates.

While most news over the last few months has understandably focused on the health implications of the Covid-19 pandemic, there has been an undercurrent of concern about the overall effect it has had on people’s finances.

In the early stages of the pandemic there was a mass selloff in equity markets, which saw stock markets plunge to multi-year lows. This sudden devaluation meant that many people’s pension funds and investments took a hit, although prices have since recovered some of their lost ground.

What is perhaps more concerning than the drop in share prices is the likelihood of a deep recession, possibly worse than the one in 2008. However, the Bank of England (BoE) and Treasury have stepped in to lessen the impact on the economy, cutting interest rates and providing paid furlough support respectively.

WHAT ABOUT MY SAVINGS?

Interest rates were already low before the BoE slashed them to almost zero as an emergency measure, meaning they are now at a negligible 0.1 percent. With inflation running much higher than this it’s clear that savers will lose out if they keep their money in savings accounts, many of which pay no interest at all.

Some savers are switching to bonds instead, with various one-year packages offering rates of up to 1.45 percent, while others are buying Premium Bonds which pay a similar rate of interest.

In terms of protection, savings held in UK bank accounts are usually protected by the Financial Services Compensation Scheme, which guarantees up to £85,000 per person.

IS MY PENSION SAFE?

People are understandably worried about their pensions during the Coronavirus scare, but finance industry experts say there is no real cause for alarm. In most cases, they say, the UK government-backed Pension Protection Fund would act as a backstop in the case of a failing fund. They point out that even during the 2008 financial crisis only a handful of pension funds needed to be bailed out.

So-called ‘defined benefit’ pension funds tend to spread risk widely, making them a stable long-term investment. Usually it is only around a quarter of the fund that is invested in stocks and shares, with the majority invested in ‘gold plated’ government bonds and other securities. So, while there might be some turbulence in the value of your pension fund, experts say this is only likely to be temporary.

The situation is not quite as clear cut when it comes to ‘defined contribution’ pension schemes, where the risk is shifted onto employees, as these schemes are not automatically covered by government backed protection schemes.

However, this is likely to be a problem only for those who are about to retire and draw their pension, as falling stock prices which could lead to low annuity rates.

THE PANDEMIC’S EFFECT ON CURRENCY MARKETS

It isn’t just equity markets and interest rates which have been buffeted by the effects of coronavirus – currency markets have also seen their fair share of volatility.

Since the outbreak took hold in March, we have seen a strengthening of the US Dollar as investors try to park their money in a ‘safe’ currency – mostly at the expense of the value of other currencies. So-called ‘risky’ currencies, such as the Australian and New Zealand Dollars have seen their value decrease markedly as investors pull out.

The British Pound has also weakened over the period, with several sudden swings unnerving investors as well as those who rely on the strength of Sterling. We are now at the phase where lockdown measures are beginning to be wound down, but there is uncertainty about what this means for the value of the Pound going forwards.

ENSURING YOUR CURRENCY TRANSFERS ARE PROTECTED IN VOLATILE MARKETS

If you rely on transferring money abroad – say in the form of a pension – or you are thinking about making a property purchase and are worried about the value of the Pound, then help is at hand. Why not take a leaf out of the investors’ playbook and protect your exchange rates by hedging them as part of a risk management strategy?

Hedging is simply a term for managing risk. It means you pay a small premium up front that safeguards you against any wild swings in exchange rates. For example, if you were planning to make a property purchase in Spain later in the year but were worried that the Pound might devalue substantially in the meantime, you could take out something called a Forward Contract.

A Forward Contract is a risk management tool that enables you to fix an exchange rate now and keep that rate for a certain amount of time. This means you won’t have to worry about the Pound suddenly crashing and ruining your plans for buying a property abroad.

Similarly, there are other tools available, such as a Limit Orders and Stop Losses, which target specific exchange rates. For example, if you wanted to take advantage of market volatility and only transfer your money when the exchange rate is in your favour, then you could set up a Limit Order that would automatically execute your transfer when the target exchange rate is hit.

The same goes for a Stop Loss, but it works in the opposite manner, ensuring your currency transfer is made before the exchange rate plunges further. It’s a way of safeguarding against excessive losses and it gives you security in that you know the ‘worst case’ scenario up front.

PEACE OF MIND WHEN IT COMES TO CURRENCY TRANSFERS

The coronavirus outbreak has been a scary time, but if you are relying on making money transfers abroad you needn’t have the added stress of worrying about erratic exchange rates.

By using a few simple risk management tools, you can ensure your plans aren’t ruined by volatile exchange rates, giving you more peace of mind.

Final thoughts

Opening an account with Currency Solutions is completely free and you’ll be able to make currency transfers anytime at our excellent exchange rates.

We appreciate that navigating the currency market can be daunting! So, a dedicated account manager will always be on hand to offer guidance.