The i Paper: Everything you need to know about your pension

The initial storm looks to be over for defined benefit funds as the Bank of England's emergency action provided the liquidity needed. They should now have their houses in order. The main message for members is that the Pension Protection fund provides a safety net for them. Unfortunately, things are not so positive for those in DC schemes approaching retirement, many of whom will have a large part of their investments in gilts or investment grade corporate bonds, all of which have fallen significantly. This leaves members with an unenviable immediate choice: stay invested knowing that things could get worse but hoping they improve or move to cash and effectively bank the losses but reduce future risk. In the long run, the damage to pensions will cause yet more problems for the UK's debt position. This is because many will be forced back onto state support due to insufficient pension savings, caused by pension losses but also people being forced to use tax-free cash lump sums to pay down their own personal debt caused by the current cost of living crisis. The whole situation is a catastrophe.

The headlines may have caused panic among savers but people shouldn’t be worried about the recent news on pension fund bailouts. The Bank of England’s emergency intervention into the bond market mainly affects those with final salary pension schemes. This is because final salary schemes tend to own a lot of government bonds in order to pay pension liabilities decades into the future as well as for hedging purposes. Nonetheless, final salary schemes are heavily protected. Typically, the trustees of private-sector final salary schemes are under a strict regulatory regime to keep it sufficiently funded. If the trustees deem the final salary scheme to be short of money, they can ask the employer to contribute more. In the worst-case scenario of an employer becoming insolvent, members are protected by the Pension Protection Fund (PPF). The PPF is a lifeboat scheme ensuring that those already in receipt of their final salary pension receive their full entitlement, and those not yet retired receive 90% of their entitlement. Those with defined contribution (DC) pensions, which are typically used for auto enrolment, will only be affected if they are invested in government bonds. You can normally decide where your money is invested but the default option is typically a blend of equities, property, bonds, gilts and other assets. Younger savers will have less in government bonds, as they are seen as less risky than assets such as equities. As a saver gets closer to retirement, they may have more in government bonds, albeit not a large proportion. Those closer to retirement may have seen the value of their pension drop over the past few weeks as a result, but this isn’t just down to government bonds as it’s not been plain sailing for stock markets either. For those paying money into a pension on a monthly basis, volatility isn’t necessarily a bad thing and you may benefit from pound-cost averaging, which could smooth out the ups and downs of the stock market. Market volatility is part and parcel of investing. There will be times where the value of a DC pension rises and times when it falls. It is important to take a step back from all the volatility over the last few weeks and maintain a long-term view with a pension. Your pension may be supporting you throughout retirement, and hopefully, this is a small speed bump in a long road. For savers about to retire, it is important that you regularly review your pension to ensure that it is still meeting your objectives. Drawing money from other non-pension sources, such as an investment ISA or cash savings, could ensure the long-term sustainability of the pension pot. The knock-on effect of the current economic situation is that annuity rates have increased in the last few months. This means you may be able to get a higher income if you buy an annuity.

Unfortunately, within most of the recent scare stories relating to pensions, there was no distinction made as to what type of pensions were potentially affected. Many with personal pensions or defined contribution pensions were left fearing they could lose their pot, when it in fact related only to what are known as final salary pensions or defined benefit pensions. Even then, talk of these schemes becoming insolvent was untrue. With such pensions, the investment risk is borne by the scheme itself. As long as the employers who sponsor the pension schemes remained solvent, there was never a risk of members' pensions not being paid in full. If you're saving regularly into your pension each month, and are still many years away from retirement, market volatility is not something to be afraid of. Markets will always rise and fall. When they are down, as they are this year, your regular contributions will be buying into the markets at a discounted price. When they rise, this will help to boost your returns. If you walked into a shop and everything was marked at 20% off, most people would think it a good time to buy! If you're close to retirement you should hopefully already have a financial plan in place. The most important thing for you to know is 'how much is enough'. By this I mean, how much is enough to live the life you want in retirement, without fear of running out of money, no matter what happens. For some, they may already have more than enough, despite recent market falls, and their retirement plans should be unaffected. Others may have had their plans set back by the drop in values meaning they need to save more, work a little longer, or reduce their spending in retirement. Some may have final salary pensions which mean they will be unaffected by market falls in terms of how much retirement income they will receive. This is why I can't stress enough the importance of having a financial plan. I've seen too many people go on working longer than they needed to, worried that they didn't have enough, who then ran out of time before they ran out of money. Life is not a rehearsal!