Pension woes

Anyone approaching retirement should be asking the question, 'How does a sudden drop in the value of my pension impact my plans?' Whether it causes sleepless nights will depend on the robustness of those plans. Having to work longer than they perhaps intended or change the way they plan to spend their retirement are steps people can take when they have no time to manoeuvre. To avoid having to take corrective measures, the best thing to do is plan retirement well in advance with an expert. A financial planner will model your desired retirement based on your current financial position and expected spending habits. This provides a reliable source to what you can and cannot afford to do. It will also include 'stress tests' to show the impact of your pension suddenly falling in value. Having a good retirement plan has avoided many retirees sleepless nights. If anyone is worried about recent events spoiling their retirement, they should speak to an independent financial adviser.

We are seeing the opposite of what we would expect with investments at the moment. Cautious portfolios, which have a larger amount of bonds, are being hit harder than adventurous portfolios, which have a larger amount of equities. The main reason you would hold a cautious portfolio is because you do not want to be exposed to as much volatility as an adventurous portfolio. If you do not need to access your money in the short term then you probably do not need to do anything. If you have built up your investments over many years then the chances are that even though we are in a temporary decline, you will still make a profit overall when you sell. It is very rare that you are going to retire at the exact high of the market and sell everything at that point. Take the cash you need for the next 12 months and reassess later in the year."

Spend a penny save a pound. Or in the case of pensions advice, save your retirement. The problem is apathy, as many work-based pensions still use lifestyling approaches that automatically move members into gilt-based funds that were designed to track annuity rates. The idea being that as gilts fell, the equivalent annuity would rise and hence some level of risk was mitigated. The problem is that fewer and fewer people follow traditional retirement models now. Instead we see the use of drawdown products that allow for part-retirement. Individuals who have sought financial advice historically probably have a more balanced set of investments in their pension pot so should have experienced less volatility. For those who have not received financial advice and are invested in Gilts, they have experienced significant losses that they will be unable to recover. Aviva's Stakeholder Long Gilt fund, for example, being down 38.28% over 1 year to 30th September. These funds were commonly described as low risk due to historic low volatility but that all changed with interest rate volatility and now these funds are commonly rated 5 out of 7.

I have seen people's investments in so called safer assets drop as much as 20% since March this year, which is a shock to the system and has put many people's plans in jeopardy. There is no way to know whether they would have lost more or less if they had been invested in equities because it completely depends on the kind of fixed interest and also the equities they are invested in. However, people need to be sure they don't suffer from sequency risk, which is essentially taking money out of their investments at the wrong time, which in turn erodes more of the capital that they have built up. The fixed interest market dropping so dramatically is unheard of during the past 40 years and this has always been seen as a less volatile asset class than, say, equities. Again, having a mixed portfolio and different investment vehicles mitigates the risk of coming to retirement age and realising you can't retire for another year or so because of market conditions. Ideally, this shouldn't happen. People are genuinely concerned because these assets haven't particularly increased in value over numerous years and now they are seeing downward volatility associated with equities. These are extremely tough times and people are worried about their planning going forward and are having to adjust plans or look at other means to fund their retirement. It's important people look at their whole portfolio, understand where there are gains, and also identify their losses. I would advise people to look at their retirement objectives, to make an informed decision on whether their big expenditures can hold on for the markets to recover. I would definitely recommend people seek advice and understand what the best options for them are. Even a conversation can ease your worries, if you do have any.