Brief hopes of some stabilisation yesterday as the FTSE 100 rebounded were dashed as yet more red appeared on Wall Street screens, with the S&P 500 index on the edge of bear territory and the Footsie falling further today (9 April).
Moreover, the 30-year UK gilt yield has surged to its highest since 1998, after US Treasury yields soared: it has hit 5.64%, pushing well past a previous multi-decade high of 5.472% set in January.
Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said: “Market crashes like this will be unnerving many more people than they used to because the decline of defined benefit pension schemes in the private sector and auto-enrolment have turned most employed workers in the UK into investors.
“Most in the private sector will be in defined contribution pension schemes, and many of those will be in the default fund, which will usually be a mixture of equities and bonds. While share markets have born the brunt of Trump’s tariff bombshells, bond markets are also gyrating.
“The self-employed will be more likely to have a personal scheme like a stakeholder pension or a self-invested personal pension (SIPP), and depending on how they have invested their contributions, they are likely also to see sharp falls in the “paper value” of their pot.
“Some savers might be looking at their pension account, seeing red, and panicking a bit – but for many defined contribution pension holders who don’t need to access their pension savings in the near future, there is little jeopardy at the moment and no need to make changes.
“They should mostly avoid messing around under the bonnet of their pensions while there are lots of moving parts, as it can just lock in losses. In fact they can take a bit of comfort in that their regular monthly contributions will be picking up cheaper investments.
“We have seen time and again that shocks hit equity or bond markets in the short or medium term, but that in the long term they recover.”
Defined benefit pension schemes
Smith said: “Defined benefit pension holders should be largely unaffected as their payouts are mostly fixed and guaranteed.
“But with bond markets as well as equity markets in turmoil this week, some DB scheme member might be having unpleasant flashbacks to the gilt market rout in late 2022 and early 2023 that followed the Kwarteng-Truss mini-Budget.
“A replay of the leveraged liability-driven investment (LDI) crisis which the September ‘22 mini-Budget had a hand in causing – by enflaming already rising gilt yields – seems unlikely as DB schemes took steps in the wake of that scare to adjust their strategies.
“Even in that eventuality, however, savers are heavily protected and it would take quite an extreme turn of events for there to be any concern on the part of DB scheme members.”
Defined contribution and personal pension holders
Smith said: “It’s often said at times like this that it’s those “on the verge of retirement” who worry most but more accurately it’s those who were on the verge of accessing pension funds. After all, some people take their 25% tax-free cash as a lump sum when they are still working – to pay down the mortgage, for instance – and continue to earn and pay into their pension for another 10 years.
“Some people retire and don’t need to access their pension cash straight away. Some have a very set date as to when they want to stop working and start using their pension, while for some it’s a very moveable feast.
“People in these different situations can and will react differently to market crises like we’re seeing now – but in many instances advice from a financial planning or investment professional can be invaluable, as one thing the current cataclysm demonstrates is that retirement planning is not easy in the age of defined contribution pensions where savers take the investment risk and must decide how to access their funds.
“For instance, the Autumn Budget announcement that unused pension assets will be included in inheritance tax liabilities from April 2027 has prompted many savers to think about drawing down on their pensions earlier and more aggressively than they had envisaged – because it will no longer be so tax-efficient to leave substantial pension assets at death.
“Those plans could now be upended by this turmoil because drawing down on pension funds currently might involve selling investments at sharply lower valuations than just a few weeks ago. For some elderly savers, who don’t know how long it will take for their investment valuations to recover, they could feel like they are between a rock and a hard place.
“Potentially complex investing, tax and cash-flow decisions are in play, not least – for those who are accessing their pensions – in the sequencing of how all savers draw down on their pot.
“So yes, someone who was about to take money out of their pension pot and has it all in equities will not be in a great position at the moment, as if they go ahead with their plan they will be locking in investment losses. They would ideally delay the withdrawal but while it may not be much help to them now, the key is not to be in that position in the first place.
“Some will have to change their plans – for instance, if they had been planning to take their 25% cash-free lump sum to pay down the mortgage they might have to put that off, unless of course they had switched their investments before the recent correction to prepare for this. There might even be some people, reliant on their pensions for an income in a retirement they had wanted to begin shortly, who decide to work a bit longer and let their pot recover.
“What those a bit earlier in their savings phase can learn from events like this is that market volatility does occur now and again and there are steps that can be taken to lessen the impact if it should happen in the future when they are on the verge of retirement.”
