Pension Savers Unaffected by China's Troubles

OPINION: Ignore the headlines, says Morningstar Editor Emma Wall - pension freedoms mean market blips are no longer the death knell for pensions

Emma Wall 26 August, 2015 | 1:00PM

On Monday, the investment world imploded. Or at least that's what a number of the news headlines would have you believe. We were all going to hell in a handcart - billions of pounds were wiped off the FTSE 100 - ditto dollars off the S&P 500 and euros haemorrhaged from indices in Paris, Frankfurt and Zurich. Today, things are looking up – although year to date the FTSE 100 is still down 7% and its lost 11% on a 12 month view.

Why did Black Monday happen? It all comes down to uncertainty. If there is one certainty in investment it is that markets hate uncertainty. All year equities have been battling the unknown; contending with ongoing dramas from Athens, a slumping oil price and the threat of interest rates rising. Last month Chinese officials meddled with the stock market causing ripples - and wobbles - for global equity prices. Last week Chinese officials devalued the currency, and markets went into freefall.

The actions of the Chinese government in devaluing the renminbi in order to boost economic growth are not that dissimilar from the policies of Prime Minister Shinzo Abe in Japan – where the devalued yen has boosted the Nikkei stock market over the past two years. But the difference between the two is one was expected and the other a shock.

Does it Matter?

In short – no. Pot-stirrers on Monday compared the fall in stock markets to the global recession of 2008. From November 2007 to February 2009 the FTSE 100 fell more than 40%. A loss of 10% over the past 12 months is not comparable – especially considering the significant rally in the five years previous. Lest we forget this is the same year that the FTSE 100 broke through the much coveted 7,000 points mark.

Back then retirees did see the value of their pension pots reduced – and then suffered the double whammy of having to take their depleted capital and buy an annuity with it to provide an income in retirement. This was doubly unfair because back then a 15 year gilt yield – the interest rate that annuities are based on – had fallen to 3.7%, having been 5.11% just a year earlier.

But now – thanks to the freedoms that came into play in April – pensioners do not have to buy an annuity. Those retiring in the midst of a market blip have more options available to them. Do you need your money now? If not consider holding you nerve markets as may rise again and you could recoup losses. Or, take some money now as your capital requirements dictate and leave the rest in a well-diversified portfolio, reinvesting any dividends if don’t need income and can afford to harness the power of compound interest.

Are There Any Risks for Pension Savers?

Of course there are always risks associated with equity investing, and so capital depreciation is a consideration when planning an income for or in retirement. Working out your risk appetite and your capital requirements are essential parts of investing a retirement portfolio.

But crystallising your losses by panic selling as the market falls is not the answer – if anything if you have a long term investment horizon and a steady hand now may be the time for contrarian investing. The FTSE 100 has already risen 300 points since 2.30pm on Monday.

Don’t Have the Nerve for Volatile Markets?

Regular savings plans can help you make the most of these market blips, be it through a workplace pension, or personal a SIPP or ISA account. If you are investing a steady drip stream through market fluctuations you automatically buy more units when the market falls, meaning that when it rises you reap the benefits of a larger holding.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Emma Wall  is former Senior International Editor for Morningstar

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites