Sunday, November 27, 2022

Market volatility hits pension prospects of millions

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Older retirement savers are being urged to review their pension strategies as market volatility leads to big losses for millions of savers in workplace retirement plans.

Savers logging on to check the value of their automatic enrolment workplace pensions are confronted with falls of 10 per cent or more in the value of their funds.

Millions of people in the UK are saving into workplace pension funds where the size of the eventual retirement pot depends on factors including how much is paid in and the fund’s investment performance.

However, the average balanced pension fund was down by just over 11 per cent this year, according to FE Analytics, a research group. Its comments come as a national campaign is under way to encourage savers to pay more attention to their pensions.

“While looking at your pension pot and seeing a big drop in its value might feel painful, it’s important to remember that you only make a loss if you realise it,” said Tom Selby, head of retirement policy with AJ Bell, an investment platform.

“So someone in a workplace pension scheme in their 30s or 40s who has seen the value of their fund go down hasn’t made a loss at all. Provided they are comfortable with the risks they are taking, there should be no need to do anything at all.”

While younger savers may have time for their pots to recover from recent market falls, older savers, with fewer years until retirement, are in a tougher position, say advisers, particularly if they are in popular “lifestyled” funds.

As the “lifestyled” individual progresses towards retirement, these funds automatically switch their savings from more volatile assets, such as global and UK equities, to traditionally less volatile ones, such as fixed income and cash.

In previous years, the bond allocation has shielded older savers, typically those 15 years or fewer away from retirement, from stock market lows but this year has proved an exception, as both fixed income prices and equities fell in tandem.

“The big problem is in relation to lifestyling funds and people sleepwalking into a bond market disaster as they approach retirement,” said Selby.

“If you aren’t planning to use your fund to buy an annuity then you are probably not feeling great about the performance of your fund recently.”

Legal advisers to pension trustees said schemes that planned to send out annual benefit statements in coming weeks were braced for calls from worried members seeing falls in their funds.

“Some members who read those statements will question why their pension has fallen so much, and some may even want to push it further,” said Stephen Scholefield, partner at law firm Pinsent Masons.

“Most trustees will have a perfectly good rationale as to why the fund is invested in the way it is, but it is bound to take some explanation to get members comfortable with that.”

David Penney, a chartered financial planner, does not believe members should remain in funds with a traditional lifestyle approach and should take financial advice as they get closer to retirement.

“The idea of automatically moving members into long-dated gilt funds is outdated and dangerous,” said Penney, a director with Penney, Ruddy & Winter, an advisory firm.

“Many lifestyle funds use cash and gilts, which lack diversification and are very sensitive to interest rate movements. The logic was to act as a hedge against annuity rates, but most people no longer buy annuities.” 

Selby said people approaching retirement who are in lifestyled funds should review their strategy: if they plan to take a flexible income in drawdown, they should look at adjusting their portfolio to align it with their strategy and risk tolerance.

“Alternatively they might now be tempted to buy an annuity with some or all of their pot,” said Selby.

Annuities look more attractive today because interest rates, on which they are based, have moved up from their historical lows. As rates have risen, so have annuity payments.

“The final option is to sit in bonds and pray the market recovers, but that is neither guaranteed to happen nor necessarily sensible,” said Selby.

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