As share prices tumbled at the beginning of this week, Denis Oakley, a 50-year-old entrepreneur from Loughborough, sold everything in his self-invested personal pension, apart from gilts.
“I can’t see any upside at the moment and lots of potential downside,” he told FT Money on Wednesday. “It’s better to move to cash and sit out the market for six months because I have no idea what is going to happen.”
Oakley, who teaches strategy to business leaders and has 15 to 20 years until he plans to retire, said there was “just too much uncertainty” and he was happier locking in a 15 per cent loss and moving the money into cash and hoping inflation isn’t too bad.
His worries echo that of millions of Britons who may have seen wild swings in value of their self-invested or defined contribution pension savings as markets have whipsawed this week.
Global stocks — the bedrock of long-term retirement savings plans — had fallen 11 per cent after US President Donald Trump announced his tariff blitz, before recording their best day in more than a decade as he partially backed down.
An escalating trade war with China, however, has weighed on equities, which remain 7 per cent lower since Trump’s “liberation day” announcement.
But whether or not Oakley will benefit from sitting out the market for a few months remains to be seen. Analysis from Fidelity shows that £100 invested in the S&P 500 in 1993 would be worth over £2,000 today. If you had missed the five best trading days in that period — your returns fall to under £1,300.
The events of the past week have made many in the UK rethink their pension investment strategy — for some it will have been a nasty wake-up call. But with the road ahead still perilously uncertain, what steps can you take now to better protect your retirement from the whims of markets?
Should I keep investing in the stock market?
While some savers have been fleeing stocks, others have been buying the dip. Some of the UK’s do-it-yourself investment platforms have seen record trading volumes in recent days as choppy markets have coincided with the end of the tax year.
Financial advisers say that while the composition of your portfolio should depend on how close you are to retirement, and large falls can be anxiety provoking, staying the course and remaining disciplined with your savings plan usually works out better.
In the five years before retirement, it is often advised to start moving some of your investments into lower-risk assets to protect the pot from sudden drops in value, with regular reviews to help keep your retirement plans on track.
“The worst response is to crystallise paper losses by disinvesting,” said Jon Greer, head of retirement policy at Quilter. “Most workplace pensions remain heavily weighted towards equities and volatility is a trade-off for the long-term growth they offer.”
Analysis from Vanguard shows that savers who sold a 60 per cent shares and 40 per cent bond portfolio in the depths of the Covid-19 market crisis in March 2020 — and then bought back in four months later — would have had a 37 per cent rise in their portfolio from the point at which they sold to the end of last year. Those who had stayed the course would have seen a 62 per cent rise over the same period.
“It shows really clearly the damage to wealth over the long run — selling out is not good for your investing success,” said James Norton, head of retirement and investments at Vanguard Europe.
By continuing to pay into your pension, you can also benefit from pound cost averaging when stock prices fall. This is because you buy more units of an investment when prices are lower, potentially smoothing and enhancing returns over time.
Should I rebalance my portfolio?
If you are in a defined benefit pension scheme, which delivers a secure retirement income, typically based on salary and length of service, or have an annuity, the amount you receive should not be impacted by falling stock markets. If you are in a workplace defined contribution pension scheme — like the majority of private-sector workers — they will probably be doing this for you.
Nest, the UK’s largest defined contribution pension scheme, told FT Money it was “proactively looking for opportunities to capitalise on market dislocations,” as stocks had fallen by more than bonds which allowed it to rebalance portfolios at “attractive valuations”.
For those managing their pensions themselves, market dislocations can throw your intended asset allocation off course, and some investors have been looking to top up their equity exposure as prices have fallen.
Younger people are likely to want more invested in equities than those approaching or in retirement. Vanguard’s “lifestyling” funds, for example, allocate a portfolio of 80 per cent equities and 20 per cent fixed income to investors in their 20s and 30s, before gradually increasing the bond allocation over time, down to a floor of 30 per cent equities in retirement.
Financial advisers suggest having a disciplined approach to rebalancing to avoid having any decisions led by emotion. That could be a decision to check asset allocation and perhaps rebalance every month, or if assets move by more than 5 per cent beyond your intended allocation.
“We are driven by fear and greed . . . we might not like to think we are but we are . . . if you’re nervous you might make poor decisions and sell at the wrong time,” Norton said.
Does 60/40 still work?
A portfolio with 60 per cent in equities and 40 per cent in bonds is a mainstay of traditional retirement portfolios which aims to balance growth from stocks with stability from bonds.
The strategy’s popularity dwindled in 2022 when stocks and bonds fell together as central banks around the world lifted interest rates, and Vanguard’s 60/40 portfolio lost 11 per cent. However, with yields on bonds now at a higher level, the strategy looks more attractive.
Some financial advisers suggest adding other asset classes to diversify your portfolio further.
Stuart Bartholomew, an independent financial planner at Craven Street Wealth, suggests a “multi-bucket” approach, where you secure some of the assets that you’re going to need in the first three to five years of retirement in low-risk level or in cash, but you keep a large portion of the portfolio invested, with the expectation that its value may rise or fall.
But he wouldn’t use long-dated government bonds for his low-risk allocation, because they fluctuate more than their shorter-dated siblings and can fall significantly in value.
“Instead we would look at short-dated government bonds, infrastructure, alternative investments and cash, to have some certainty in those returns in the last few years before retirement,” he said.
Is now a good time to get an annuity?
An FT Money reader who asked not to be named is retired and had planned to withdraw some of her capital from her DC pension to supplement her defined benefit income but was in the process of switching her investment adviser. The timing of this shift was painful, she said, as it delayed her plans to buy an annuity.
“The effect of Trump’s tariffs has now made it difficult for me to move my money as I do not want to realise losses ,” she said.
“Given the real uncertainty about what is going to happen to the value of my pension, it seems that the best course of action at the moment is to do nothing, but for how long?”
Annuities have been popular in recent months because higher UK government bond yields have enabled providers to offer more attractive rates.
These could come down, however, if the UK enters a period of recession and the Bank of England is forced to cut interest rates quickly. Annuity rates are linked to interest rates, so when interest rates go down, annuity deals become less attractive.
If you’re planning to get an annuity it’s important to shop around for the best rate, taking into account your age, health and other personal circumstances.
If you were thinking of getting an annuity but your portfolio has dropped significantly in value, it may be sensible to wait for a recovery if you are in a position to.
“I have one client with whom I arranged an annuity last year — she’s thinking of buying another annuity this year but just needs to wait and see what happens to the value of her pension pot,” said Billy Burrows, a financial adviser at Eadon.
“Gilt yields may fall but they won’t fall dramatically — so we won’t see the same swings in annuity rates that you see in the stock market.”
What about tax?
If you’re early on in your career, you may have been spooked by this week’s stock market turmoil. But advisers say those with decades to go before they retire have plenty of time for their funds to recover.
They also suggest thinking about paying more into your pension to accumulate your pension savings free of income tax and capital gains tax. You can pay in £60,000 (or up to 100 per cent of your earnings) per year to your pension, but this allowance is tapered if you earn over £260,000.
When you reach the pension access age of 55, rising to 57 in 2028, a quarter of your pot is generally available tax free, up to a maximum across all your arrangements of £268,275, and the remaining three-quarters is taxed as income.
But some savers worry that the amount you can withdraw tax-free could be reduced.
“The level of uncertainty in the outlook is also compounded by the fact that [chancellor] Rachel Reeves is likely to need to raise revenue and one possibility is that she may take away the 25 per cent tax free element of the pension,” said the reader who has delayed buying an annuity because the value of her pot had fallen.
“I find myself juggling between the reduction in the value of my pension pot caused by Trump’s tariffs, the amount of the loss on the 25 per cent tax free element of my pension and the interaction of the two,” she added.
For money invested outside of a tax wrapper, you can offset any crystallised capital losses against future capital gains indefinitely but make sure you notify HMRC or record your losses in a self-assessment tax return.
Locate all of your asset pension assets
While minds are focused on pension values, it is a good time to check you have full sight of all your retirement benefits.
The Pensions Policy Institute estimates that there are now 3.3mn lost pension pots containing £31.1bn worth of assets. The Association of British Insurers has estimated that 1 in 30 people have lost track of at least one pension.
You can use the government’s pension tracing service to locate a lost pension. In some cases, lost pots may even include valuable defined benefit entitlements or protected tax-free cash rights, Greer said.
Are you re-thinking your retirement plans? FT readers respond
I’m planning on retiring in about 6-8 years’ time. I’m not making any changes yet even though Trump’s tariff tantrums have cost me ~$250k in less than a week. I expect a significant bounce when his idiotic policy blows up — The end is nigh, via FT.com
I am cross with myself as I thought about selling everything into cash a couple of weeks ago. I resisted on the basis some downside was priced in and Mr Trump surely wouldn’t impose this madness, so there would be a bit of a bounce. How wrong! —GTKP, via FT.com
Planning on retiring in 3 years. I guess I’ll have time to figure out how broke I’ll be. The retirement fund is 50 per cent stocks, 25 per cent bonds and 25 per cent REITs so the total movement has not been as great as the S&P 500. But it is distressing — gn842, via FT.com
I am 62 and was thinking about retiring at the end of the year. It’s painful to watch a 10 per cent decrease in the value of your pension and Isa, but the reality is that valuations are about what they were a year ago so it’s not too bad. My plan is to keep the current allocations and keep up the monthly contributions to the trackers, and probably work another year to make up some of the loss — Red Dog, via FT.com
