Pension savers may have noticed the value of their retirement funds have taken a hit since the start of the Iran war
Stock markets have had a turbulent few weeks with significant volatility due to the war in Iran.
Pension savers may have noticed the value of their retirement funds have taken a hit, as many workplace and pension schemes are invested in shares, bonds, and other assets.
This means when the value of these go up or down, so can the value of your pension.
Investing is, generally speaking, designed to be for the long term, in order to ride out waves in the stock market.
So should you be worried about your pension if its value has dropped since the start of the Middle East conflict?
In the latest update today, global stock markets have jumped after the US and Iran agreed a two-week ceasefire.
The FTSE 100 rose by almost 2.6% at the start of trading, while key Asian indexes such as the Japan Nikkei 225 and South Korea Kospi increased by more than 5%.
The ceasefire followed threats by President Donald Trump that “a whole civilisation will die” unless Tehran met his demands.
What Iran war means for your pension
The most common type of workplace and private pension is called defined contribution (DC).
This is where you pay into a pension scheme with regular contributions and the size of your pot depends on how much you have saved – and the growth of your investment – by the time you retire.
They work by investing your contributions – and employer contributions, if it is a workplace pension – into the stock market and other assets.
Tom Selby, director of public policy at AJ Bell, told the Mirror that short-term hits should not be a massive cause for alarm for pension savers – particularly if you are not yet near retirement, as you have time to ride out any waves in the stock market.
However, he said people could run into problems if their investments and retirement plans “are not aligned” and they are close to wanting to access their pension.
With this in mind, Mr Selby noted that it is important to check your investment approach matches your plans.
He said: “For example, if someone is invested 100% in equities but plans to turn their pension into a guaranteed income for life by purchasing an annuity within a year, they would be a hostage to short-term market fortune.
“Equally, if you are invested in a fund which is targeting annuity purchase in the coming years – as many people in old workplace pension schemes from insurers will be – your investments will likely be ‘hedged’ against movements in annuity rates.
“With interest rate expectations rising as the spectre of higher inflation looms, annuity rates will likely follow suit – meaning funds aimed at hedging against annuity rates should, all things being equal, fall.
“If you are planning to buy an annuity then that’s all well and good, but if you no longer intend to do so – and most people today choose the flexibility of drawdown when they access their pension – you could be sitting on a substantial fall in the value of your investments.
“For anyone in this position, the options are to either sit tight and hope the value of your investments recovers or shift your portfolio so your investments match your retirement intentions and accept that you might need to wait a bit longer to access your pension (or take a slightly lower income).”
He added: “When markets go through tough patches such as now – and as we have seen plenty of over the last decade – it’s important not to get swept up in a wave of panic.
“It is always prudent to give your portfolio a health check to ensure that you’re happy with the shape of it and the risks you are taking.
“Spreading these risks across sectors, geographies, and asset classes (such as bonds and gold) could help to limit any blows.”
You are auto-enrolled into a workplace pension scheme if you earn over £10,000 a year, are over 22 and below state pension age.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%. Your contribution is deducted from your salary.
If you have a defined benefit (DB) pension, then your retirement pot is based on your salary history and years of service, as opposed to how much your have contributed to your pension.
This means it is not impacted by stock market performance.
What about the state pension?
The value of your state pension that you receive today is not impacted by the Iran war. The state pension has just risen by 4.8% in line with the triple lock.
The triple lock guarantees the state pension increases every April based on whichever is highest out of earnings growth in between May to July, inflation in September, or 2.5%.
The full new state pension is now worth £241.30 a week, or £12,547.60 a year.
However, while you amount you get today will not change, if the war was to continue for many months and it sent inflation soaring, this could affect how much the state pension is worth next year.
Mr Selby said there could also be ramifications for public spending in general, including the state pension, if borrowing costs soar and the UK is forced to reduce spending on some benefits as other areas, such as defence, are pushed up.
