Billions of pounds have been wiped from the value of UK pensions in the past few days after Donald Trump announced wide-ranging tariffs on imports to the US.
The move has posed a threat to businesses’ profits, which has meant stock markets have been hit by several days of turbulence.
With investments in stock markets all around the world making up a key part of people’s retirement savings in the UK, those checking the balance of their pot this week may be concerned about the value of their pensions.
Many will be wondering what the best course of action is, and though for specific direction on their needs they would need to seek financial advice, there are certain principles that experts say should generally be adhered to.
These will vary, depending on your age and the type of pension you have, with The i Paper running through the key need-to-knows below.
Ten years or more away from retirement
The earliest you can take your retirement pot is 55 currently, and will rise to 57 in three years’ time.
So for those aged around 47 and below – as well as those who are above 47 but are more than 10 years away from when they plan to retire – most experts say the best guidance is to sit tight.
Investing if often referred to as a long-term game, and people’s retirement pots have taken hits before – for example during Covid, when stocks also fell dramatically.
Over a long period of time, stock markets have generally recovered from plunges such as the one we are seeing now.
Helen Morrissey of Hargreaves Lansdown said: “The key is not to panic and make knee-jerk reactions that you come to regret later. We will all experience periods of stock market turbulence during our pension saving journey.
“In recent memory we have seen this with the Russia/Ukraine conflict and the Covid pandemic.
“Making knee-jerk reactions such as changing investment strategy or cutting back on contributions can crystallise losses and make it harder for your fund to recover. It’s important to make sure that your strategy is well diversified to protect your pension from these ups and downs.”
Workplace pension providers will choose default investments for you automatically, and will try and put your money across a range of assets.
If you have a self-invested personal pension (SIPP) or you have opted to change the funds your workplace pension is invested into, you may need to be more proactive in ensuring your cash is well-diversified.
Approaching your retirement
If you are within 10 years of retirement, then your pension provider may start to move your pension into less risky investments.
This may mean your pension value is less impacted than you might expect.
“You may find that you have been invested in a lifestyling arrangement which moves you out of equities into bonds over time. In this case you may find you have been less impacted than you thought,” explains Morrissey.
However, if you are very close to retirement and your pot has decreased in size, you will not have the same amount of time people younger do to recover the losses.
This may particularly impact you if you are about to take your lump sum – up to 25 per cent of your pension pot, that you are able to take tax-free.
Mike Ambery, retirement savings director at Standard Life, said: “If you have a defined contribution pension, which are now the most common arrangement in the private sector, then the most important thing to think about is whether you plan to make any significant withdrawals, such as accessing your 25 per cent tax free cash imminently.
“There is a risk if that if you make a significant withdrawal while markets are lower then you not only get a smaller lump sum but also leave less scope for your remaining pot to recover in which case it’s important to take a view on whether now is the best time to start accessing your money and whether you can afford to wait.”
Morrissey says some may choose to delay retirement.
“Some people will opt to delay their retirement until markets have recovered. Others will decide to take less income than they initially planned,” she said.
Already taking your pension
The ways in which those who are already taking their pension will be impacted depends on how they are receiving it.
If you have taken your pension as an annuity – meaning you have already bought a guaranteed annual income with your pot, you will be unaffected.
“However, you also need to consider the impact of inflation on your retirement income over time and make sure that what looks like a good level of income right now remains so in the future,” explains Morrissey.
If you are drawing down from your pension – taking money from your pot regularly while leaving the rest of your money invested, you may find the amount you have saved fluctuates.
“Your money will remain invested and will have scope to recover as markets do,” explains Ambery.
“One tip that people can consider to manage periods of investment volatility is to gradually build up several months of living costs in cash if they can afford to do so. This way, if markets do dip you don’t need to sell investments when the price is low and can give them time to recover,” he adds.
But there are warnings over how long things may take to recover.
“Things are incredibly unpredictable from day-to-day at the moment, and it doesn’t automatically follow that if markets have fallen sharply they will inevitably recover quickly,” explains ex-pensions minister Sir Steve Webb, now a consultant at LCP.
Doctor, teacher or other ‘DB’ pension holder
Although all the above applies to those with defined contribution (DC) pensions, which are the most common type, the situation is different for those with defined benefit (DB) pensions.
Among current workers, this mainly includes those in the public sector, but some older workers in the private sector have them too.
These pensions do not rely on investment performance, and instead pay a set annual income each year in retirement based on years worked, and salary when working.
“If you have a defined benefit pension which are the norm in the public sector and still reasonably prevalent among older workers in the private sector then your income won’t be affected by the markets as the income is guaranteed,” explains Ambery.
