Keep calm and carry on paying into your pension: Savers face difficult choice between volatile stock market and tumbling annuities
Our ability to build retirement wealth through saving into a pension faces a multitude of challenges in the wake of the country’s decision to vote to leave the EU.
Long-term savers saw their pension funds slide in value in response to Friday’s sell-down in shares – in the UK, Europe and across the globe – compromising their retirement prospects.
And the future security of benefits that millions of workers have built up inside attractive company pension schemes could be jeopardised, especially if low interest rates persist, stock market volatility continues and the economy totters on the edge of recession.
Many people on the cusp of retirement also face key questions on whether to opt for the security – but poor value – of an annuity or to keep their pension fund invested and take income under the pension freedom rules introduced in April last year.
Uncertainty: The future security of benefits that millions of workers have built up inside attractive company pension schemes could be jeopardised
Tom McPhail, head of retirement policy at fund broker Hargreaves Lansdown, says: ‘Brexit presents some immediate risks and uncertainty for our retirement income. But there are opportunities for long- term investors too.’
Here are the key issues for pension savers to consider:
Stock market falls are most disconcerting for people who save in new-style defined contribution pension funds. This is because they can immediately see the impact of such market slides on the pension fund they are painstakingly accumulating – most people now have online access to their pension, enabling them to see how it is progressing or regressing.
A majority of workers contribute to such plans – either through schemes offered by their employers or personal pensions if self-employed. Under such arrangements, the retirement income that someone can eventually draw from their pension fund is dependent upon three factors: the fund’s investment performance; the amount that someone (and their employer) is prepared to contribute into the plan over their working life; and if they buy the security of a lifetime income at retirement, prevailing annuity rates.
McPhail says investors with such pensions should not be panicked by last week’s stock market falls – or by further share price weakness in the coming weeks. He says: ‘We are likely to experience a period of sustained volatility in the markets and uncertainty in the wider economy.
‘In these conditions, acting in haste is unlikely to serve you well. If you are still years from retirement and making regular savings, then just keep going. Remember, falls in the market mean that you can buy investments in your pension fund at a lower price. In most cases, the best pension strategy is to keep calm and carry on.’
Check where your pension is invested
Reviewing where your money is being invested inside your pension makes sound financial sense. A diversified investment strategy is best – across investment funds, markets and assets. Many schemes offer default fund options which are often invested across a variety of assets or lifestyle funds designed for people of a particular age. These can be sound options.
Steven Cameron, pensions director at financial services giant Aegon UK, says: ‘Our key message to pension savers is “don’t panic”. If you have a defined contribution or personal pension, you have to accept it will be affected by stock market movements.’
For those on the cusp of retirement, the current mix of market uncertainty and low interest rates makes the decision on how to convert a pension fund into retirement a difficult one. Until recently, most people converted their fund into a regular retirement income through the purchase of an annuity. But poor rates have dissuaded many from pursuing this route. McPhail says a 65- year-old would today get a lower annuity rate than a 60-year-old would have obtained just six months ago.
New pension freedom rules, introduced in April last year, have also encouraged many retirees to keep their pension fund invested, drawing down income when they need it.
Billy Burrows, of William Burrows Annuities, is a longstanding pension annuity expert. He predicts that annuity rates will continue to fall but he believes some pension savers may now prefer the certainty of an annuity in an uncertain economic, financial and political world.
He says: ‘Pensioners taking an income from an invested pension fund face a potential double whammy – a falling fund value further depleted by income withdrawals. I predict a slow but sure resurgence in the popularity of annuities.’
Those who opt for an annuity should shop around for the best – and most appropriate – annuity that takes into account any health issues and financially protects their spouse. Prudential’s withdrawal earlier this month from selling annuities in the open market has compromised choice.
OUR YOUNG WILL PAY A HEAVY PRICE FOR THIS VOTE
Fears: Jenny Squillaci, pictured with her husband Vittorio and grandsons Luca and Leo, says future generations will suffer
Jenny Squillaci is deeply worried about the vote to quit Europe – as is her Italian husband Vittorio.
She fears it will permanently damage relations with other countries and that this could lead to economic instability.
The couple met after the Second World War when Vittorio escaped the devastation of his nation to start a new life in Britain.
Jenny, 68, of Basingstoke, Hampshire, says: ‘I fear leaving the European Union is a retrograde step – it is a Dad’s Army mentality, looking back to a Little England that never existed.’
She adds: ‘One of the arguments I have heard is that to leave will help us get Britain back. What on earth does that mean? We are part of a bigger community whether we like it or not.
‘As a retired couple the vote will not affect us too much, although I have heard my right to an annual increase in my state pension may be in jeopardy.
‘But I fear for younger generations who cannot now enjoy being part of a Europe that will never let us back in after this snub.’
Jenny has two grown-up children who are considering getting dual-citizenship – having an Italian passport as well as a British one – so they still have opportunities to work in Europe.
Jenny, editor of the Fiat 500 Enthusiast’s Club’s magazine, says: ‘My major concern is that our economy suffers because we will not have such good trading agreements with other countries in Europe – and this is bad for all future generations.’
Most defined benefit company pension schemes in the private sector are now ‘closed’ which means workers can no longer contribute to them.
Such arrangements, commonplace in the public sector, are viewed as deluxe because they pay pensions based on a combination of years worked and a worker’s final salary at retirement – or career average salary.
Yet many schemes are under-water, with insufficient assets to meet all their liabilities, fuelling concerns that some will not be able to pay the pensions promised.
Latest data from the Pension Protection Fund – which mops up stricken pension funds – indicates that company pension schemes are in deficit to the tune of £300billion.
With low interest rates now certain to prevail for the time being, and the danger of an economic slowdown, the outlook for some company pension schemes is bleak. McPhail warns: ‘The upshot could be a need for companies to do more deals to reduce benefit levels.’
EXPERT'S VIEW: Keep cool and plan for the long term
Steve Webb was Pensions Minister in the Coalition
By Steve Webb, Royal London
For pension savers, these can seem like frightening times. Seeing stock markets plummet and the Prime Minister resign can unsettle even the most experienced investor. But what is the real impact of Brexit likely to be on pensions?
The first thing to bear in mind is that for most people pensions are a long-term project. Over a lifetime of pension saving there will always be market booms and crashes, so it is important to avoid a knee-jerk reaction.
Those who have saved steadily into a pension – topped up by tax relief and employer contributions – will have a far better retirement than those who have not.
Also, many company pension schemes will be invested in a range of markets and assets, not just UK equities – which should dampen the impact of stock market falls here.
Getting a good pension has always depended in the long run on a healthy economy. While we are about to experience a period of considerable uncertainty – years, rather than weeks or months – the crucial question is whether we can negotiate robust trading deals with other European countries and the rest of the world.
Britain was a trading nation before we joined the EU and many countries sell more to us than we sell to them, so they will have an incentive to help us get through the present uncertainty.
For those people who are already retired there is speculation that the Government may have to cut spending and could target perks such as the ‘triple lock’ on the State pension. But given the way older voters had a crucial impact on the outcome of the referendum, it would be a brave Government that decided pensioners should be first in the queue for cuts.
In any case, with a fragile economy, the case for austerity and spending cuts is weaker rather than stronger.
Investors thinking of making major changes to their savings should seek impartial advice. But keeping a long-term perspective and a cool head is wise counsel.
Steve Webb was Pensions Minister in the Coalition