Market volatility and pensions

As you approach retirement you may find yourself with lots of questions. When can I retire? How much will I have to live off? What type of retirement product is best for me? How can I ensure that I don’t run out of money? Is there a way of making my pension go further? Some people will already know the answers to these questions but for others, it can be difficult to know where to begin!

A financial adviser can help you feel more in control of your retirement savings plans, make decisions about your pension savings with confidence and, when the day comes, help you make the right choices when it comes to covering the cost of your lifestyle in retirement.

Financial advice vs financial guidance – what’s the difference?

Something you might not realise is that ‘financial advice’ and ‘financial guidance’ are not the same thing, but rather they are distinct services – and it’s important to understand the differences between the two.

Financial guidance can explain what financial products are available to you and how they work, educating you as to your options and empowering you to make your own decisions. It’s also free, which makes it a great starting point regardless of how much help you think you might need. Financial guidance can be an invaluable tool to help support your financial decisions, but it is not based on your individual circumstances and needs, and therefore cannot provide you with a personalised recommendation on the best course of action for you. Examples of financial guidance include information found on the gov.uk website, or Moneyhelper’s Pension Wise Service. Educational information from your pension provider can also count as financial guidance. 

Pensions are a form of investment and, like all investments, their value can go up or down. Fluctuations in value are very commonplace, even in well-performing investments, but periods of market volatility can bring far more extreme an unpredictable behaviour. In can be unsettling to hear about sudden drops in the stock market, or to see that your pension pots or investments have decreased in value overnight, but it’s important not to panic. Understanding why this happens can help give you the reassurance you need to make the right decisions regarding your pension investments.

Why do pension values fluctuate?

A typical pension pot could be invested in any number of things, including stocks in well-known companies, government bonds and property. If these investments perform well, your pension pot may increase in value. If they perform poorly, then the value of your pot may decrease.

Pension funds are typically structured in a way that reduces risk and encourages investment growth but if you’ve ever paid close attention to the performance of your pensions on a month-by-month basis you may have noticed that even a well-performing pension fund might occasionally dip in value, only to bounce back a month or two later. This is perfectly normal as markets naturally fluctuate, with particular stocks or assets having good or bad months.

The aim of any pension fund manager is to try an ensure that these downturns are just blips, and that a fund’s value trends upwards over time. So if it seems like a particular investment is likely to continue to perform poorly, fund managers may make adjustments to how they invest your pension, shifting to better-performing assets

What does market volatility mean for my pension?

Occasionally there is an event of such significance that it has a major impact on pension investments, beyond the typical ups and downs. This is because these events have a wide-reaching financial consequences that go beyond a particular business or sector. Examples of events like this include the global financial crisis of 2008, the COVID-19 pandemic, and, most recently, President Trump’s trade tariffs. These events all caused significant volatility in the global stock market which, in turn, had a significant impact upon pension investments.

Typically, market volatility can result in a drop in pension value, though this can change quickly depending on how the stock market reacts to a changing situation.

The amount your pension is affected by market volatility can depend on how exactly your pension funds are invested. Pension funds, especially default funds, typically spread their investments across a wide range of assets to minimise the impact that any one area performing poorly will have on your pension. However, it is also possible you have more custom pension investments that may be more vulnerable, or more resistant, to changes in the market. If, for example, your pension funds are more heavily invested in UK stocks and assets, their performance is more closely tied to the financial performance of the UK as a whole. If the UK experiences a period of economic growth, or a sudden downturn, these investments will be more affected.

If you are earlier in your career, or a while off retirement, then a sudden drop in the value of your pension may not have a significant long-term impact. This is because there is plenty of time for the market, and your investments, to recover before you need to rely on them to fund your retirement.

However, if you are approaching retirement, or are already retired and using your pension, then a sudden drop in the value of your pension could have implications for your retirement plans.

What should I do?

In any period of market volatility, the most important thing to do is remain calm and don’t panic. Acting quickly without first assessing your options can cause more harm than good, as decisions that are made impulsively can often lead to poor outcomes.

It’s also important to remember that markets do typically recover over time. So while the short-term impact may be unwelcome, this should always be viewed with a long-term mindset – especially if you are a long way from retirement.

If you are already at retirement age, or plan to retire soon, fluctuations in the value of your pension investments could have an immediate impact upon your retirement plans, at least in the short-term. It is worth reviewing your plans to see if they are still the best way to provide you with the retirement you would like. And if you are already in retirement, it might be beneficial to make adjustments, for example by reviewing your withdrawals if you are using pension drawdown.

If the idea of your pension pot changing in value while you are retired is not something you feel comfortable with, it might be that an annuity is a more appealing retirement option for you as this will provide you with a guaranteed income, regardless of how the financial markets are performing. However, annuities do come with some restrictions when compared to other retirement options, and purchasing one is a big decision that cannot be revered so it’s important to consider this carefully.

If you are concerned about the impact market volatility could have upon your retirement plans and unsure about the best course of action, you could consider getting financial advice. A Financial adviser will be able to review your retirement plans to determine whether or not they are still suitable and advise on any appropriate changes, giving you peace of mind that you won’t face any unwelcome surprises as you take your pension. For more on financial guidance and advice, click here.