Don’t panic. That’s the message from financial advisers to savers unnerved by falls in the value of their pensions over the past week. The losses you have suffered are purely hypothetical, for now, at least. They are paper losses. Your pension is now valued at less than it was previously. You’ll only turn these paper losses into real shortfalls if you sell your pension investments. The temptation may be to move pension savings out of riskier assets into safer holdings, but that will mean crystallising your losses. It could also see you miss out on any recovery as and when the markets bounce back.
Instead, remind yourself that pensions are the ultimate long-term investment. If you have no plans to cash in any of your pension savings in, say, the next five to ten years – or even longer – you can afford to ride out the volatility. There is plenty of time for your pension savings to bounce back, as they did after the much steeper falls seen during the early months of the pandemic five years ago.
Indeed, market falls create the chance to benefit from pound-cost averaging. If you’re making regular savings through a fixed contribution each month, this cash sum will buy more shares when prices are lower. This gives you a boost when markets start rising again, effectively smoothing out some of the ups and downs of investment. What if you’re closer to retirement and preparing to take some money out of your pension savings? Here, too, the news may not be as bad as you think. You may already have begun to move your savings into lower-risk assets (less affected by the panic), or your pension provider may have been doing this automatically on your behalf.
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Tempering the impact on your pension
Even if not, and you have taken a big hit close to retirement, there may be ways to mitigate the damage. Using an income drawdown scheme, you can take a limited sum out of your pension if you need to do so to keep your plans on track; the rest can be left invested to benefit from a market recovery, or you may be able to delay cashing in any of your savings. Perhaps you have other assets to fall back on, including your state pension entitlement.
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Another possibility is that you’re now in a stronger position to convert your pension into income by buying an annuity, providing you with a guaranteed income for life. Annuity rates are at their highest level for ten years and may stay high if the Bank of England keeps interest rates at current levels for fear of an inflation shock from the US tariffs.
If you’re in retirement, you’ll only be affected by the market upheaval if you’ve opted for an income-drawdown arrangement over an annuity. If so, the money you still have invested has scope to recover, although you may want to look at reducing the income you’re currently withdrawing – or even taking a break from drawdowns – since you’ll otherwise be depleting your shrunken savings at a faster rate. Known as “pound-cost ravaging”, this can cause real problems, particularly early in your retirement years. One way to counter the effect is by only withdrawing income your pension pot generates rather than drawing down any of the capital value, although this may not be affordable for everyone.
Still, the upshot is that most pension savers – both pre- and post-retirement – are not in dire straits. If you’re some way off retirement, keep calm and carry on – although this episode is a useful reminder of the importance of sensible risk management and diversification, something to review once the turbulence subsides. If you’re more directly affected, take advice on exactly where you stand. In times like these, independent financial advisers really earn their money.
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