Protecting your pension when markets are volatile
Pension savers could be forgiven for looking the other way in recent weeks, with market volatility having taken a heavy toll on the value of many people’s retirement pots.
Conflict in the Middle East has shaken global markets, sending indices tumbling as tensions escalated, only for them to rebound sharply on hopes that an end to the fighting may be in sight.
Keeping a cool head during difficult times can be tricky, especially if you’re approaching retirement, or already drawing an income from your pension. However, there are steps you might be able to take to make weathering stock market storms a little easier.
Focus on the long-term
Although it might be tempting to put off pension saving altogether during periods of volatility, taking a break from contributions can have a significant impact on the amount you end up with at retirement.
Mike Ambery, Pension Savings Director at Standard Life, said: “The challenge is that pensions build over decades, so even relatively short gaps can have a bigger impact than people expect. A pause might feel temporary at the time, yet it can have a lasting impact if contributions aren’t restarted.”
Continuing to contribute to your pension during market downturns can also work to your advantage. When markets fall, you’re effectively buying investments at lower prices, which may boost your returns over the long term when markets eventually recover. While this doesn’t remove risk, it highlights the importance of staying invested rather than trying to time the market.
Don’t forget pension tax benefits
It’s also worth remembering the valuable tax benefits that pensions offer. For example, if you’re a basic rate taxpayer and you pay £80 into your pension, HMRC will top this up to £100, and if you’re a higher or additional rate taxpayer, you’ll receive even more tax relief on your contributions, which you can claim back through your self-assessment tax return.
Charlene Young, Senior Pensions and Savings Expert at AJ Bell said, “Pension tax relief means no income tax on your own contributions today, instead you are taxed when you take the money out of your pension in retirement.
“That’s after another incentive – tax-free cash – which is usually up to 25% of your pension value when you access it. That deferral is a major incentive, since most people will have a lower income, and therefore less of a tax liability, when they’re retired.”
If you’ve already retired
If you’re already taking income from your pension using drawdown, which means your pension savings remain invested and you take money out as and when you need it, you might want to restrict the amount you take out when the value of your savings has fallen, if you can afford to do so.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: “A flexible approach is important to make sure you aren’t taking too much out and potentially depleting capital.”
This approach can help reduce the risk of locking in losses during market downturns and give your investments more time to recover.
If you’ve already used some or all of your pension to buy an annuity, then you’re protected from stockmarket fluctuations as your annuity provides you with a guaranteed, stable income for life (or a set term).
While market volatility can be unsettling, whatever stage of life you are at, pensions are long-term investments designed to weather ups and downs, so aim to avoid knee-jerk decisions and stay focused on your long-term goals.