Many individuals have lost thousands due to stock market falls, shaking up their retirement plans. What can you do if your pension has lost a third of its value
Advisers managing client’s retirement plans take account of the individual’s capacity for loss and calibrate the risk taken with the client’s objectives and timeline. This means that someone in retirement, or close to it, will have a higher degree of defensive assets in their portfolio and will not be wholly invested in just one asset class, which could trigger this degree of loss. Although major stock markets have fallen by 25%-30% in the first quarter, most advised client’s assets have fallen by much less.
This degree of reduction in value is only likely to be experienced by those wholly invested in shares, if they are advised investors, it is likely retirement is a long way off. They should see this as an opportunity to buy assets at reduced prices with their future savings which over a longer time horizon are likely to recover.
While global stock markets have been ravaged in recent weeks, it is worth reflecting that the FTSE 100 is still 40% higher than at the trough of the financial crisis in 2009. Moreover, fixed interest investors have seen their holdings grow in value, as investors have fled to the quality of government bonds. A rotation from fixed interest to shares could see value restored over the medium-term.
Advisers also counsel their clients to maintain a degree of easy access cash which acts as a buffer in times of high volatility so that they should not need to encash investments at short notice, to deal with short term emergencies. Building up these savings is a prerequisite to becoming an investor.
Those who have followed this advice should therefore not need to cash in their pensions now. Indeed, those who are over 55 should resist the temptation to encash their pension funds, as doing so could reduce their ability to rebuild their retirement savings with tax relief, if they fall foul of the money purchase annual allowance.
They should revisit their plans with their adviser and consider whether they can afford to add more to their retirement savings, to take advantage of buying at lower prices, a strategy which could enable them to recoup short term losses more quickly. If not, and their time horizon is shorter, they may need to consider delaying retirement to wait for funds to recover or accepting a lower level of retirement income in the first instance. While a lengthy lockdown is likely to depress share prices and dividends, so that recovery may be a longer process, cashing in now is likely to do more harm than good to portfolios which have suffered these levels of loss.
Kay Ingram is director of Public Policy at LEBC