Important information: the value of investments can go down as well as up so you may get back less than you invest.
When you’ve saved diligently into your pension all your working life, sudden market volatility can be unnerving, to say the least. But whether you’re about to retire or are already retired, are thinking about buying an annuity or considering drawdown, here’s what you need to know.
The past year in markets has been especially volatile, thanks to
inflation, the war in Ukraine, interest rate rises and the prospect of recession. But that doesn't mean you can or should avoid the financial markets. Investing in stocks and bonds has historically given your money the best chance to grow, although this is not guaranteed of course.
If you’re close to retirement
Depending on how you plan to access your pension money, you may have already seen the level of risk in your pension pot reduce, with higher levels of cash and bond based assets and fewer volatile assets, like shares, than you may have held a few years back. Some of these traditionally ‘safer’ assets have also experienced recent swings in value but they generally remain less volatile than shares.
Those intending to leave most or all of their pension money invested after they retire - in order to access it via drawdown, for example - are likely to be holding higher levels of riskier assets, such as shares. These are likely to have suffered in the recent market sell-off.
Successful investing means riding out short-term volatility and leaving your investments where they are if you can.
Even if you are on the cusp of retirement, hold tight. By selling falling assets, you’re more likely to lock in losses and erode your pension savings, than you may if you stay invested and wait for the turbulence to run its course.
Easier said than done, but the key is not to take knee-jerk action. Market ups and downs are normal over the short-term, and staying invested will, more often than not, be the course of action that pays off in the end. Having a pot of cash on hand to provide income, which can then be replenished from invested assets over the longer term, means that there is less need to sell investments to provide income.
If you want to do something, check your investments still suit your needs and goals.
If you’re in retirement
It may feel counter-intuitive, but if you’ve remained invested and are taking income through drawdown, it can be a good idea to temporarily reduce the amount of income you take right now, when market moves are potentially more exaggerated than usual. Our pension drawdown calculator can help you understand how much income you could take and how long your pension might last.
Much like an investor still growing their pension pot, if you drawdown too much money during a market fall you will miss the chance to recoup any losses when markets pick back up. If you can push through the short-term downturn by effectively doing very little with your investments for now, you have a good chance of benefitting from the eventual recovery and get through this without volatility hitting your capital.
An annuity, which you can buy using all or part of your pension pot, can help you lock in some certainty and can be a good way to provide a set income and give you the breathing space to leave the rest of your pension invested. If you’ve been considering buying an annuity, now may be a good time as rates have started to rise recently.
A combined drawdown and annuity strategy can work well during times of volatility; giving you the reassurance of a guaranteed income as well as the ability to stay invested and benefit when the market turns around.
