Market volatility and your pension

It’s hard to ignore the headlines about the risks created by trade tariffs.

And it’s not just the headlines. Anyone checking the balance of their pension savings recently is likely to have noticed the impact from markets as well. The announcement of US trade tariffs - and the chance that other nations retaliate with tariffs of their own - has triggered a sell-off in stock markets around the world, dragging the value of retirement funds lower in the process.

In times of extreme market volatility - as we have seen since the announcement - there is a risk that individuals may act in haste and make mistakes that have a long-term impact on their finances. There are lots of reasons, however, why they may not need to worry as much as they think, and why panicking now can lead to a worse outcome when markets settle.

Here are some points to consider as markets continue to swing about.

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

The true impact of the falls we’ve seen depend on how long you have until you need to access your pension money. Anyone with at least 10 years until they need their pension money - may have the advantage of time to survive 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 that the relationship between taking risk in order to generate returns is more.

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.

The run up to retirement should mean less risk

Not everyone has decades to go before they’ll need their pension money. If you’re a bit closer to retirement the concern is that steep losses may not have time to recover.

Yet many pension savers in this position may enjoy some protection from the stock market falls because they hold a proportion of their money in lower-risk assets like bonds and cash.

The performance of bonds has been disappointing over recent years, compared with equities, but in the recent market sell-off, better quality bonds have performed their role of a counterweight to shares, rising when the stock market has fallen.

Like cash, bonds pay a predictable return and those issued by governments are considered a relatively low-risk investment. That means they are attractive in times of economic stress. Fears of an economic slowdown caused by the tariffs has seen a flight to the safety of better-quality bonds and their price has risen.

Many workplace pension schemes will automatically increase your allocation to bonds in the run up to retirement to protect against precisely the sudden losses for shares that we have seen this year.

If you are invested in Fidelity’s default, FutureWise, we are monitoring and governing this for you already

FutureWise has been designed to meet the long-term objectives of members by taking risk where appropriate and has the necessary governance and investment oversight to make tactical asset allocation decisions that adapt to market conditions.

FutureWise is highly suitable for those members who are not looking to make ongoing active investment decisions. If you are considering making an active investment decision, it is important that you consider your willingness to continue making investment decisions in the future and take appropriate steps to react to future changes in market conditions. 

If you select your own funds with Fidelity …
And still have lots of contributing 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% or 20%. 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 could actually help their long-term success because it allows them to be purchased cheaper.

Selling now could mean you don’t participate in any recovery

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 you pension investments now in the hope of missing even worse markets 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.