Pension savers are being warned to watch out for certain risks and pitfalls amid sliding markets.
Global markets have been rocked by US President Donald Trump’s imposition of tariffs, with ongoing turmoil and uncertainty about trading relations.
Investment platforms Hargreaves Lansdown and Interactive Investor have both reported seeing record numbers of trades on Monday this week, with more buys than sells in signs that investors have been seeing market dips as a buying opportunity.
Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said market volatility “will be unnerving many more people than they used to because the decline of defined benefit pension schemes in the private sector (which pay retirees a guaranteed salary-based income) and auto-enrolment have turned most employed workers in the UK into investors”.
Mr Smith said many people in private sector workplace pension schemes will be in defined contribution (DC) pensions. With DC schemes, the saver bears the risk of the eventual size of their pension pot, based on factors such as investment performance.
He added: “The self-employed will be more likely to have a personal scheme like a stakeholder pension or a self-invested personal pension (Sipp), and depending on how they have invested their contributions, they are likely also to see sharp falls in the ‘paper value’ of their pot.
“Some savers might be looking at their pension account, seeing red, and panicking a bit.”
Mr Smith continued: “We have seen time and again that shocks hit equity or bond markets in the short or medium term, but that in the long term they recover.”
He said the right approach for people will vary, depending on their own situation and circumstances, including what assets they hold outside pensions.
People may want to take guidance from Government-backed body Pension Wise or to seek independent financial advice, when working out what is suitable for their own needs.
While everyone’s situation will be different, Mr Smith highlighted some general risks and potential pitfalls for pension holders to consider:
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– 1. Becoming too wary of any risk
Mr Smith said: “It can be tempting to reduce risk dramatically across the whole pension pot if you think you need to access cash and/or retire shortly.
“But maintaining investment exposure is often essential for long-term sustainability.”
He continued: “As many more of us are living well into their 90s, and as some of us are looking to retire early, the prospect of a 40-year retirement is not unthinkable.
“Most people will not have a pension pot that is big enough to take risk off the table entirely and still provide an income for that length of time.”
He said people may benefit from being invested in a “well-diversified portfolio” through retirement, giving them “the flexibility to adjust income levels and respond to changing market conditions”.
– 2. “Sequencing risk”
This could be a particular risk for those close to retirement.
Mr Smith said: “Sequencing risk refers to the danger that early losses in retirement, combined with withdrawals, can do lasting damage to your portfolio as you are selling down investments for withdrawals when prices have fallen.
“For example, if markets fall in the early years of retirement and you’re withdrawing income at the same time, you could lock in those losses, reducing your capital base and limiting future recovery.
“Mitigating sequencing risk means planning ahead, keeping a cash buffer, keeping other funds invested for long-term growth.
“Having different portions of your pension pot, and other savings and assets outside it, means you can be flexible with withdrawals, and adjust to market conditions.”
– 3. Becoming a “forced seller”
Mr Smith said: “For someone thinking of retiring and using their pension for income, we would recommend up to two years of additional income shortfall in cash or cash-equivalent to ride out exactly the sort of circumstances we are seeing right now.
“In each case, liquidity will cover unexpected costs without tapping into your investments. Those who have assets outside of their pension, can pause or reduce pension withdrawals during market downturns. Either way, the aim is to avoid being a forced seller at the wrong time.”
– 4. Being too rigid with pension withdrawals
Mr Smith said: “A rigid, fixed-income approach can be risky during periods of volatility. Instead, consider a dynamic withdrawal strategy that adjusts based on market performance and your spending needs.
“For instance, you might withdraw a set percentage – rather than a set monetary amount – of your portfolio each year, allowing for some flexibility. In years of strong market returns, you can afford to take more. In weaker years, drawing less can help give your investments time to recover.”
