Pensions: Expert offers tips for contributions
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Those close to or at retirement age will be the worst affected as cashing out pensions now could mean a significant loss of value with inflation rising. That said, they may be able to repair the damage by amending their plans or waiting until markets stabilise.
On BBC Money Box, Richard Tomlinson, chief investment officer at Local Pensions Partnership, answered a listener’s question about their pension in this current economic climate.
Stan emailed: “I have two private pensions, both about £50,000 each.
“I have not taken them yet but I’m concerned the value of these is being reduced.”
Savers who invest via modern defined contribution pensions will have suffered stock market losses recently but unless they are near retirement they are unlikely to face any damage.
Mr Tomlinson said: “There are bigger factors in play in a stand-alone portfolio.
“They might have come down because shares have fallen and because gilts have fallen.”
When asked what savers should do next, he suggested people take their time with decisions.
He said: “I would not be making any rash decisions at this point in time I would be trying to look through these short-term challenges.”
He added: “I hope people don’t try and cash in their pensions because from my perspective you are a long way from this.”
Gold-plated and generous final salary pensions provide savers with a guaranteed income until they die, and typically carry on paying a reduced sum to spouses if they survive you.
Much attention has been paid to the Bank of England’s high-profile intervention to shore up final salary pension schemes during the current market crisis.
This is because they are heavily invested in bonds, particularly in long-duration gilts, but some became forced to sell due to exposure to risky hedging strategies known as ‘liability-driven investments’.
But ordinary members’ pensions are protected because they individually bear none of the investment risks.
Even if the worst happens and their scheme goes bust, their pensions will be rescued by the Pension Protection Fund.
Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Savers in these schemes are often gradually shifted into bonds, which have historically been regarded as the “safer” option.
The idea is to protect savers against abrupt downturns when they are just about to start tapping their pensions, by buying an annuity that generates a guaranteed income, or more commonly these days via an invest-and-drawdown scheme.
Rob Morgan of Charles Stanley said: “With both bonds and shares falling in value this year, most people’s pension values have taken a tumble.
“This isn’t a problem for those with plenty of years left to retirement.
“Continuing to contribute regularly, adding tax relief and the contributions of your employer in your workplace scheme on top, will mean you are adding to assets at lower levels, and you stand to reap the rewards through compounding your investment returns over time.”
He suggested that anyone who is worried about the state of their finances should seek help from an independent financial adviser, who will help them make informed decisions.
This is particularly true of those approaching or in retirement, who might feel as though their financial plans have gone up in smoke.
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