Even without the downturn that has gone on over the past couple of days, around £160bn has been wiped off the value of pension funds. That means even less to buy your retirement annuity with.
The erosion in value of defined contribution schemes or workplace stakeholder pensions is the equivalent of a £46,417 loss for each of the 3.4 million workers who are in such pension schemes (an average, amounts do vary).
A report by Aon Consulting, one of the UK’s biggest pension firms, delivers a stark warning to those who are about to retire: you might be forced to work longer.
The Government are already under pressure to change the rules on annuities. Currently, people coming up to retirement are forced to cash in their investments for a regular pension income, usually an annuity. With the value of their pension fund having dropped, this annuity income level is hit.
The impact of a stock market crash will be much worse on future generations as more of them will have their pension savings invested in equities. In 20 or 30 years or even sooner, it could be a much worse picture. There will be a lot more people with significant holdings in equities, Aon claim.
Pension funds have taken a battering in recent months and the outcome will undoubtedly come as a huge shock to those investors already nervous about their prospects of funding for a decent retirement.
Some fixed-interest and defensively managed funds will have escaped the worst of the falls.
People approaching retirement will need to consider if they are prepared to accept any further falls in the value of their pension pot or whether they should ‘move to safety’. Those closer to retirement may ultimately have to consider either delaying their retirement or simply lower their retirement annuity expectations.
Income draw-down may be an option, whereby you can take 25 per cent of your pension pot as a tax-free lump sum and keep the remainder invested in the stock market. There are, however, no guarantees the value of your fund will recover.
