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Avoiding the pension panic

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product are not normally possible until age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Avoiding the pension panic

Like most people in the UK, you may have seen the value of your pension drop recently, following the Coronavirus outbreak and global repercussions of this crisis.

Current market conditions may be unnerving, but market volatility shouldn’t stop you focusing on your long-term investment goals and it’s important not to make knee-jerk decisions when it comes to your pension.

To help you understand and manage your pension during these turbulent times, read our six top tips.

1. Volatility is a normal part of long-term investing

It’s never nice to see your pension fall in value, not least when there is so much uncertainty about, but the most important point to remember is that volatility is a normal part of long-term investing.

The market impact of Covid-19 has, unsurprisingly, been dramatic. The falls witnessed in markets across the globe will be remembered for their speed and ferocity.

To understand this better, it’s important to get your head around the concept of volatility. The prices of investments rise and fall and that impacts market movements - markets have been incredibly volatile in recent months with spectacular rises and falls in stock markets across the world, often on consecutive days. This is what can happen in markets at times of peak uncertainty.

2. Long-term investors can be rewarded for not shying away from risk

To really get your head around the fact that volatility is part of long-term investing, it’s important to understand that volatility and risk are not the same thing. Volatility, however painful it may be, is not risk. It simply reflects how quickly or how far the price of an investment moves. Risk, on the other hand, is a measure of how likely it is that an investment will deliver a permanent or long-lasting loss of real, inflation-adjusted value.

How correlated the two are is determined by an investor’s time horizon. There are other factors also to consider. Ultimately, for a long-term investor, particularly a younger one who is many years or even decades away from needing to use their money, volatility is part and parcel of your investing journey.

If you are in the accumulation phase - in other words, still building your pension pot - just hold tight. Market ups and downs are normal over the short-term – staying invested over the long-term will often mitigate the effect of the highs and lows seen in recent weeks and months.

Where the situation gets more complicated is when you don’t have years to wait for a recovery and then further growth – or, to put it another way, you’re getting close to retirement. If you’re in this position, there are two key things you can do. First, think about where you’re investing. And then consider the income you need.

Read our six considerations for those who are nearing retirement

3. A stop/start approach is lose/lose - try to maintain your pension contributions

With so much uncertainty about, you’re probably taking a long hard look at your finances and thinking about where you can make cuts. If you are considering reducing your monthly pension contributions, think long and hard.

Check the contributions that your employer is making to your pension savings - have you made the most of what’s on offer? Some employers will contribute a basic amount to your pension plan and offer to contribute more if you do too - essentially, it’s free money for your future. And now, more than ever, we all need to be thinking about our future finances.

4. Regular savings stack up

There’s another reason why you should keep contributing to your pension pot, despite current market turmoil. Maintaining this savings habit is a good way to stay on track with your goals, and can also take some benefit from the ups and downs of the market.

When markets fall you pay a lower price meaning you buy more shares or units for your money. This is known as ‘pound cost averaging’ because the different prices you pay when investing regularly through the ups and downs of the market will be averaged out. And, if you buy when prices are low, you could reap all the rewards when they rise again. Although it is worth remembering that past performance is not an indicator of future returns.

5. Diversify, diversify, diversify

Second-guessing where, never mind when volatility will strike, is far from easy, which is why making sure you don’t keep all your eggs in one basket is key.

Having a mix of assets from shares and funds to bonds and cash, across different sectors and geographies is the best way to ensure that one spell of volatility doesn’t take your entire portfolio down with it. Spreading your assets means sharing the risks and is an essential for any investor.

At retirement stage, many investors will have gradually reduced their appetite for risk and so, a portfolio on the brink of pension drawdown will usually hold a higher level of cash and less volatile assets than in the early stages of accumulation. Cash reserves can be used to cover falls in the market without touching the actual investment. Although investors may want to sell in erratic markets, ensuring this is not a necessity is important.

6. A reminder to get on top of your pension paperwork

Now is as timely a reminder as ever to make sure you are on top of your pension paperwork. Consider checking your ‘Expression of Wish’ or ‘Beneficiary’ form to make sure they are up to date. This should only take a few minutes to complete and your pension providers can provide the forms.

Bringing together pension pots from different employers can also help with paperwork, as it means you’ll have just one company to deal with and a single view of your retirement savings. This can make it easier to see what you have, how your money’s performing and where it’s invested, so you can ensure you are properly diversified for the years ahead.

Fidelity’s low cost, award-winning SIPP can make a good home for old pensions, with a wide range of investment options giving you more ways to reach your investment goals and flexible income options at retirement.

If you think you’ll benefit from consolidating, you can find out more here.

Important information: It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances, we strongly recommend that you seek advice from an authorised financial adviser.

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