Managing your pension in volatile markets

Volatile markets are always challenging for long-term investors, especially those approaching retirement.

During the past couple of weeks we’ve seen some sharp falls in share prices as markets try to assess the potential impact of coronavirus. And if your pension and investments have taken a hit, you’re likely to be feeling more than a little nervous. But don’t panic.

Successfully managing a pension – like an HL Self-Invested Personal Pension (SIPP) – during volatile markets requires a level-head. At times like these it’s important for you to go back to basics and re-focus on your long-term plan. Unfortunately, market volatility doesn’t come with a guide, but to help you review your SIPP, our experts have come up with a five point plan.

This article isn’t personal advice, so if you're not sure if an investment or course of action is right for you, please ask for advice.

1. Consider delaying your retirement plans

The recent stock market activity may, unfortunately, have an effect on your retirement plans and the best time to access your money. Remember from age 55 (which is set to rise to 57 from 2028) you can usually take up to 25% of your pension as tax-free cash. But if you take it now, you’ll be taking 25% of a reduced figure.

If you’re hoping to retire in the near future, you might consider waiting to give the market extra time to hopefully recover so you can make the most of your tax-free cash entitlement. That being said, it’s too soon to tell when recovery might happen or what it will look like, the value of your pension could fall further. The key is to be as flexible as possible. You don’t have to access your pension all in one go, you can do it in stages.

Our pension calculator is a useful tool to help determine how much you could get when you retire, how much you should consider saving to achieve your target and evaluate whether to delay taking your pension.

Pension calculator

2. Review your investments

It’s important that your portfolio matches your goals and attitude to risk. Make sure the investments you hold still fit your purpose. Investments naturally fluctuate in value, and it’s likely the investments in your SIPP will rise and fall at different rates too. That’s why it’s important to keep your portfolio performance under regular review, and make sure the balance is still right for you.

A diverse and balanced portfolio which has a mixture of asset types, geographies and investing styles is likely to be less volatile and more sheltered from market falls. It’s also worth bearing in mind, the types of investments you might choose for growing your pension are likely to be different to those, if you plan to draw an income soon.

If you have online access you can view an analysis of your own portfolio by logging in to your account and, from your Portfolio Overview, select the Portfolio Analysis tab.

If you find that you’re no longer balanced, you may consider switching from assets which have done better into other investments in your portfolio which have done less well but in which you still have conviction to help even things out. It’s easy to log in to the HL SIPP online to view investments and make a trade if you need to. Though consider doing this in stages to mitigate the risk of bad timing.

To stay up to date on the investments you hold make sure you regularly read up on what investment brokers have to say about them. You can also compare long term performance and consider charges to similar investments. You can typically find this information on most investment factsheets. We also offer share insight and fund research which could help.

3. Think about your future income plan

The flexibilities of a SIPP mean they’re attractive to lots of investors. Some plan to swap their pension savings for an annuity (a secure income for life), others want to draw a sustainable income throughout their retirement, while some don’t plan to take withdrawals at all.

In general it’s said that having at least 3-6 months’ worth of living expenses held as cash is a good idea, plus an amount to cover any spending you plan to take from capital (which could be in or outside your pension) over the next five years.

On top of this you might want to have a bit extra to fall back on. Everyone’s circumstances are different so it’s important to think about what’s right for you.

4. Consider de-risking your investments

Investors who are approaching retirement, or who might need some of their money in the next few years, could think about de-risking their portfolio a bit, perhaps by moving some money from stocks to other assets like cash. This doesn’t necessarily mean selling investments straight after a fall though. You could consider building up cash over time using your investment income (such as dividends from shares or interest from bonds) and deposit the cash rather than re-investing it.

If you plan to withdraw the income produced by your investments (the natural income), you might consider holding around a year's worth of income in cash in preparation. If you plan to withdraw from capital, you could make it 2-3 years’ worth of income. You don’t necessarily have to hold this extra cash in your pension, just in a savings account you’ll have easy access to.

Remember, holding large amounts of cash may offer shelter in the short term (which isn’t a bad thing if you’re getting ready to access your pension), but it’s very unlikely to be a good long-term investment strategy, even in times like these – as there’s little growth potential.

5. Keep an eye on annuity rates and get a free quote

Don’t forget from age 55 you’ve also got the option to buy an annuity (a guaranteed income for life). You might consider using some of your pension to buy one. It’s worth getting an up to date quote to find out how much you could get (it’s usually more the older you are) – plus quotes are free.

Make sure you add in all your health and lifestyle details, it could mean you get a higher income. Remember annuity rates change regularly and may go up or down in the future. Your quotes will be guaranteed for a limited time only and once set up annuities can’t normally be changed. As always, consider your options carefully, and if you’re not sure ask for guidance from Pension Wise or get personal advice.