Anyone with money in pensions and investments could be forgiven for feeling anxious when global markets dropped in response to President Trump’s tariff announcements earlier this month. It’s natural to worry when you realise that market volatility is having a direct impact on the value of your long-term savings. Anxiety tends to bring with it an urge to act – but emotion-driven decisions rarely bring good outcomes.
In reality, there are some scenarios in which the effect of market falls on your pension require some form of action, and others when the best policy is to do nothing. Let’s take a closer look, by exploring what it means depending on where you are now in relation to retirement.
If you’re a few years from retirement
If you’ve got at least five years until retirement you can afford to take the current headlines with a pinch of salt. History tells us that when markets go down they always recover soon enough. We also know that staying invested during rocky times can pay dividends, provided you have a well diversified portfolio.
Having said that, bouts of volatility could represent a good reminder to check your pension and/or investment portfolio(s). This is to ensure they still align with your objectives and risk appetite. We cover six things to look for when reviewing your portfolio.
If you’re within five years of retiring
This is where it’s worth paying some attention to what’s happening – while also resisting any sense of panic. An important factor is the type of pension you’re in. Defined Benefit (DB, or final salary) pensions aren’t affected by market movements because their payouts are already fixed.
However, these days most people are in Defined Contribution (DC) schemes. This is where the eventual pot depends to a significant degree on investment growth. If you’re on the approach to retirement this might not matter. This is because there’s a good chance you were defaulted into strategies that automatically reduce risk on the glidepath to retirement, by shifting away from equities and moving more into safer assets such as bonds and cash.
What you do here is also dictated to some extent by what you intend to do at retirement. If you plan to remain invested, you can afford to keep a decent chunk of your portfolio in equities, albeit while still reducing risk to some degree. But if you plan to use your pension to buy an annuity at retirement, you would ideally have begun moving your portfolio into lower risk assets by now.
If retirement is imminent
This is where market volatility can have a real impact if you’re still invested in stock market-based assets. If the value of your pension is down and you’re about to retire, it might be worth considering your options. For instance, you could delay retirement and (if you have other sources of income) defer the point at which you begin taking your state pension. For every nine weeks you defer taking the State Pension it will increase by 1%. This amounts to around 5.8% extra in State Pension payments for every year that it’s deferred. Check the government page on deferring your State Pension for more on this.
Again, if you’re going to remain invested during retirement it’s important not to make knee-jerk decisions. Selling out when markets are falling only makes those losses real and means missing out on the eventual recovery.
If you’re retired but still invested
These days, most savers staying invested in retirement enter a drawdown arrangement, where they leave their pension invested and take a certain level of income from it. But volatility can have an outsized effect on drawdown pots, due to what’s called pound cost ravaging. This is what happens to your drawdown fund when you take the same level of income from your investments even when they’re losing value. Not only are investment losses compounded by the income being taken, but retired investors are less able to take the investment risks needed to recover those losses.
So, if you’re in drawdown, this is a good time to review whether the level of income you’re taking from your pot is sustainable. There are things you can do to minimise the impact that falling markets have on your retirement income. These include relying on natural income (such as dividends) for your withdrawals rather than taking it directly from the capital you invested. Financial advice is highly recommended when managing retirement income, given how complex it can be.
Ask for help
It’s always worth seeking financial advice when it comes to retirement and long-term financial plans. This is especially the case if you’re nearing retirement or already in it. There are several strategies that advisers can use to protect your portfolio from market downturns and keep your retirement finances on track.
Photo by Tim Mossholder on Unsplash
