Millions of savers have watched as stock market chaos wiped tens of thousands of pounds from their pension pots in the past two weeks.
Global stock markets have dropped by about 6.5 per cent since President Trump announced new trade tariffs and spooked investors. The FTSE 100, the UK’s main market and the S&P 500, the US equivalent, are both down about 7.5 per cent.
The falls will affect more than 20 million people who have a defined contribution pension — where how much you have in retirement is based solely on what you pay in and its investment growth. Someone with a pension pot worth £500,000 invested in global stock markets would have seen their retirement fund drop by about £32,500.
If your retirement date is a distant dream, your investments will probably have more than enough time to ride out the crash. The best thing you can do is not worry about it. For the newly retired or those who are getting close, however, the situation is more complex. Here’s how the stock market crash is affecting your pension and what you can do about it.
If you’re newly retired
The main problem facing those who have just retired is unfortunate timing, because the rhythm of the stock market can have a significant impact on how long a pension pot will last.
This is called “sequencing risk” and occurs when there are large stock market falls when you first start taking money from your pot — as weak or negative investment returns in the early years have a much bigger impact on your pension compared with the same market crash happening later on in your retirement.
Calculations by the pensions company LV show that after 15 years a £200,000 pension pot that averaged 5 per cent growth a year and provided a £12,000 annual income would be seven times bigger if it delivered strong investment growth and then crashed, compared with the other way round.
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If the pot had investment growth of 20 per cent in the first year, then settled to average 5 per cent growth across the 15 years, it would grow to £232,963. If it took a 20 per cent hit in the first year but still averaged 5 per cent growth over 15 years, it would deplete to £32,585, despite both pots averaging 5 per cent growth a year.
Alex Gaita from the financial planner Schroders Personal Wealth said: “If you’re in early retirement, you should be cautious about making withdrawals from your pension during unfavourable market conditions. We can’t control the market or completely avoid sequencing risk, but you can limit the impact of market volatility on your pension.”
Try to minimise the amount you withdraw from your pension while markets are down. If you have a cash buffer or “rainy day” fund, now could be the time to dip into it. Look at what other pensions you have (the state pension, defined benefit schemes, which pay a guaranteed income in retirement, and annuities are not affected by the stock market), and check your expenses to see if you could reduce how much you need to take for a short while.
The next step is to stay calm and stay invested. Your pension still has decades to recover, so it’s important to give your pot a chance to bounce back.
Ian Futcher from the wealth manager Quilter said: “The important thing is to avoid knee-jerk reactions. The sudden market swings feel very personal, but selling investments will lock in the hit to your pension’s value and make it harder for your fund to recover.”
If you’re about to retire
Those on the brink of retirement may rightly feel as if timing is not on their side, so finding the confidence to give up work and a steady income can seem daunting.
Double-check your retirement plan. If you are going to move your pension pot into drawdown (where you keep your money invested and withdraw an income), then you may have created a cash-flow model for your retirement based on your pension pot and expected expenses.
Check your pension values and re-run the numbers — if there was enough contingency then the maths still probably works. If you’re unsure of how to do this, a financial adviser can help.
“This can be a worrying time, but taking stock and reviewing your financial position is the best first step,” said Mark Chicken from the advice firm The Private Office. “The bottom line is that if you have a regular review of your financial plans, you should be in a good position to ride out any short-term bumps in the road.”
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If you’re still worried, consider using other assets, such as cash savings, to fund your first year of retirement while the market recovers. If you were going to take your 25 per cent tax-free cash, it could be worth pressing pause until the value of your pot heads skywards again.
And if the numbers still don’t add up, you could consider a more gradual move into retirement. Continuing to work part-time, or even as little as one day a week, can ease your finances and help your savings last the distance.
Someone aged 60 with a £300,000 pot would run out of money at 84 if they took a post-tax income of about £21,000 and had 4 per cent investment growth, according to AJ Bell, an investment platform.
If the same person worked one day a week until 65, their pot would last until age 89, and if they worked two and a half days a week, their pot would last until they were 100. The calculations assume a £35,000 salary (pro-rata) and a full state pension.
If you’re five years off retirement
If you’re a while away from retirement and manage your own pension, the answer to “what should I do?” is nothing. You have time to ride out this stock market wobble. For example, it has been just over five years since the coronavirus pandemic wiped as much as 30 per cent from stock markets, but they have more than recovered since.
If you’re in a “lifestyle” fund, it could be worth looking at what’s happening. Lifestyle funds, which include most default workplace schemes, gradually move your pension into relatively “safe haven” assets, such as bonds (although these have suffered their own volatility this week), when you approach retirement. They are typically suitable for those hoping to buy an annuity, or those who want to avoid stock market volatility once they retire.
The key point is that the switches from the stock market to bonds are automatic, and do not take market conditions into account. This means that there is a risk of being switched out of equities during a market downturn — such as at the moment.
You can’t simply call up your pension provider and ask them to stop the sale, but you could defer the switch by changing your target retirement date. For example, if you have a retirement age set at 60, you could change this to 65 and effectively push back any automatic switches by five years. But as with most major retirement planning, it can really pay to speak to a financial adviser.
