5 reasons to worry less about your pension as markets dip

Anyone checking the value of their pension recently is likely to have noticed some larger-than-normal movements in its value - and mostly in a downward direction.

Like all other investments, pension pots have been feeling the effects of the conflict that has broken out in the Middle East. Stock and bond markets - the assets that pensions tend to be invested in - have been very volatile and while we have seen both heavy falls and sudden rises in the past two weeks, most markets are some way below their level prior to fighting breaking out.

Periods of market volatility raise the risk that individuals act in haste and make lasting mistakes with their finances. There are lots of reasons, however, why they may not need to worry as much as they think, and why panicking now is likely to be the worst response.

Here’s five considerations to keep in mind as markets continue to swing about. They could help you avoid making a lasting mistake with your pension.

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1. If retirement is still a way off, you can worry less

The true impact of the falls we’ve seen depends on how long you have until you need to access your pension money. Anyone still with many years until they need their pension money - at least 10 years - can probably afford to relax more in response to these developments.

If your pension investments lose value in the short-term there will be plenty of time for those losses to be recovered, as history suggests they will be. Money held in a pension cannot typically be accessed before age 55 anyway (rising to age 57 from April 2028) so there is no need to sell investments and crystalise a loss - you can just wait it out.

2. If you still have lots of contributions ahead of you, things just got cheaper

Imagine you were going to the supermarket to buy the weekly shop, and groceries suddenly fell in price by 10%, that would be good news. So why not with assets like shares as well?

Yes - falls in share prices reduce the value of what you already hold, but they also mean that you can buy more at lower prices. That’s actually good news for anyone who still has many years of contributions to pensions ahead of them. Lower prices now can actually help their long-term success because it allows them to buy more cheaply.

3. Get recent falls in perspective

The conflict in Iran has affected different regions of the world differently. Asian stock markets have fallen the most, due to the dependency of those countries on imported energy, while the effect in the US has been more muted. Pension funds are likely to spread your savings across the regions so the hit to your pot is unlikely to match the worst headlines that you may be reading.

Additionally, these recent falls follow a period of very strong returns, and have only returned markets to levels that remain high by historical standards. For example, the FTSE 100 has fallen, at the time of writing, to the level it last hit in early February, just a month ago. At that point, the market was at an all-time high. The US market, measured by the S&P 500, has dipped only to the level last seen in November.

Meanwhile, investors are likely to have benefited from high single-digit, or even double-digit, returns in each of the past three calendar years. In other words, if pension pots are falling, it is from a high level.

4. Falls in your pension pot could mean higher income by other means

Falls in your pension pot are more alarming if you are close to retirement because there is less time for its value to recover before you’ll have to put that money to use, either by making regular withdrawals, taking tax-free cash or buying an annuity to provide a guaranteed income.

However, the nature of the recent market movements means that, while your pot may have taken a hit, the returns on offer from other income options have improved.

For example, most people living from a investment pot in retirement will also hold cash - sometimes a high proportion of cash. Higher inflation arising from the Iran conflict is expected to lead to upward pressure on interest rates, and improved returns from cash.

Similarly, yields in the bond market have jumped as well. These include on some UK government bonds which underpin annuity returns. Hence annuity rates should rise as well.

5. Selling now could leave you chasing your tail

Those seriously spooked by market falls could even be tempted to sell their investments. But remember - selling doesn’t just mean getting one decision right, you need to know the right moment to buy back in as well. If you decide to sell your pension investments now in the hope of missing even worse market falls to come, you can easily end up chasing your tail trying to work out the best time to re-enter the market

If you are sure that investments are the best place for your long-term retirement savings then it is easier - and often beneficial - to just stay invested. Extreme volatility often means that very bad days in the market are followed by very good days - and you need to be invested for both if you want to capture the long-run performance of investments. 

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). 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 one of Fidelity’s advisers or an authorised Fidelity’s advisers or an authorised financial adviser of your choice.