With news of coronavirus dominating the global conversation it’s no wonder that the stock markets have been behaving feverishly. If you have a private pension, the chances are, you’ll have some degree of exposure to the stock market. For a lot of people this may be their only experience as an investor and as such it’s only natural to feel nervous when you see your pension balance changing.
Despite the worrying headlines and your instincts to protect your hard-earned savings, unfortunately there’s no perfect antidote to a financial downturn. For most savers, the best course of action will be no action. While doing nothing can be uncomfortable, especially if the markets continue to get worse before they get better, sometimes all you can do is sweat it out and trust that things will eventually get better.
Regardless of where you are in your pension journey, it’s unlikely you’ll need to take decisive action for a couple of reasons. If you’re in your 20s, 30s or early 40s, with several years until retirement, shares and commodities can be excellent investments. That’s because they’re closely linked to market performance, and carry greater risk with the potential for higher rewards, which is what makes them less desirable assets for investors who are approaching retirement and in their late 40s and 50s.
Second, most pension plans will be diversified, spreading the risk across a range of assets such as shares, cash, property and bonds. During this particular downturn, as central banks have cut interest rates, bond valuations have climbed dramatically. There may also be geographical diversification, meaning that your pension is invested in different stock markets around the world. However your savings are diversified, the exact mixture will be designed to protect your savings from the full impact of market turbulence as when some assets decrease in value, others are likely to increase, and when some currencies fall in value, others are likely to rise.
Those nearing retirement or already in drawdown may be pleasantly surprised to find that their savings are already invested in lower-risk funds. However, if this is not the case, you may want to explore a low-risk, low-return pension that won’t deliver much by way of investment growth, but could help to protect your current pension balance. The PensionBee Preserve Plan, for example, is specially designed to safeguard savings from the impact of short-term market fluctuations by moving investments to safer assets, such as high quality fixed income.
Pension plans that target a consistent level of returns could be another option for savers who are already in retirement and withdrawing their pension. The PensionBee 4Plus Plan seeks a balance between growth and stability, and aims to achieve a long-term growth target of 4% a year, over a five-year period. If a saver were to withdraw 4% of their pension annually and generate 4% of returns on an annual basis, they are rather likely to outlive their pension. Regardless of the type of pension you have, if you’re already in retirement you may wish to be cautious about your pension withdrawals during a downturn and only withdraw as much as you need.
No matter how you feel when seeing your pension balance fall over the coming days and weeks, it’s important to maintain a level head and not make any hasty decisions that could prove damaging in the longer-term. It may surprise you to learn that some investors would argue that downturns can provide a great opportunity to grow their investments, particularly if they increase their pension contributions during this time. That’s because the underlying value of each investment is lower, meaning investments go further and more units can be bought, leading to greater returns during market recovery.
While this option certainly won’t be for everyone it’s important that as savers we treat downturns as objectively as possible, and remind ourselves that pensions are long-term investments, and no matter what happens next no downturn lasts forever.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
