Rising tensions between the US and Iran, the growing threat of coronavirus, and an oil price war have all contributed to financial market volatility levels not seen since 1987.
February 24, also dubbed ‘New Black Monday’ and ‘carnage’ saw major stock markets crash after Saudi Arabia lowered the price of crude oil in an attempt to penalise Russia for refusing to limit oil supply in efforts to cushion the impact of the coronavirus outbreak.
On March 16, fears about the Covid-19 pandemic sent the Dow Jones plunging 2,997 points, or 12.9 per cent. The S&P 500 shed 12 per cent, its worst day since 1987.
While the obvious impact is on the wider economy, the recent developments have ramifications for the pension pots of many individuals.
Those who are in defined benefit pension schemes have less to worry about, as DB schemes offer just that: a defined benefit. The investment risk for the investor is carried by the scheme, so the pensioner does not lose out, and DB schemes often have gold-plated guarantees for pensioners. This is compared with defined contribution schemes, where the individual carries the investment risk and if markets turn against them - too bad.
Data published by HM Revenue & Customs showed £2.75bn was withdrawn from pensions flexibly in the second quarter of 2019, up from £2.27bn in the same period in 2018.
- There have been major falls on the stock markets.
- Concerns exist among investors about the falls they have experienced.
- One option is to have a phased drawdown.
Stock market volatility can reduce returns in drawdown. So how are defined contribution schemes affected?
Mihir Kapadia, chief executive of Sun Global Investments, says: “The volatile markets and sharp losses will have had a significant knock-on effect on pension schemes. Since the start of the outbreak, losses have hit schemes by as much as 10 per cent and are likely to worsen as the virus spreads.”
Several commentators highlight that the market weakness is likely to see significantly reduced DC pension pots and will impact the amount retirees should withdraw.
Ricky Chan, chartered financial planner and director at IFS Wealth and Pensions, cautions: “For those in the growth or accumulation stage of saving for retirement — generally speaking, those below age 60 — this could mean sharp falls in their pension funds as the investment strategy is typically largely weighted towards equity content.”
He adds: “It would be wise to consider reducing or deferring withdrawals from funds that have suffered significant falls in value in order to mitigate the damage. Or perhaps there are other resources the client can rely on in the short term; for example, funds on deposit or lower-risk investments that haven’t suffered steep falls.”
Mr Kapadia urges pensioners against withdrawing large sums amid the current market landscape: “It is important that people avoid panicking and withdrawing large sums while the markets remain as they are.
“This is because they will be at a high risk of reducing overall pot sizes, which will impact the savings generated by them when they could have easily been brought back once the pandemic has calmed down.”