The recent volatility in the global stock markets triggered by Trump’s ‘Liberation Day’ tariff announcement may have panicked people approaching retirement or already in drawdown.

For those who are still more than a decade away from retirement, they can sit tight and not be too fazed by short-term movements in the market, however wild. The situation is a little different for someone who is about to or has already moved from the accumulation phase to leaning on their investments to help fund their living costs having stopped full-time work.

One modest silver lining if you’re in the run-up to retirement is it provides a spur to think about these issues, do some planning and start framing your decisions. First, it is important to find out how many pension pots you have. The average person has around 11 jobs in their lifetime so there is the possibility of accruing 11 different pension pots with each employer. You might have a DC (defined contribution) pension or a DB (defined benefit) pension.

WHAT IS THE DIFFERENCE?

DC pensions are typically invested in the stock market and might see a direct hit on their value when global equities ‘hit the skids’ says AJ Bell’s director of public policy Tom Selby.

‘[However], members of DB schemes are largely shielded from such events [global stock market volatility], provided the employer standing behind their pension promise remains in business.’

If you have worked at a few different places in your lifetime look through your paperwork or emails for any pension information, ask current and past employers about any pensions you had with them.

Other ways to find out about the number of pensions you have is to use a pension tracing service.

The DWP (Department for Work and Pensions) has a free pension tracing service which is a quick way to locate pension savings. 

DO YOU CHANGE YOUR ASSET ALLOCATION?

There are no hard and fast rules on what asset allocation you should have in your retirement portfolio. If you are approaching retirement you may well have already begun to increase your exposure to lower-risk assets like bonds but much will depend on your personal circumstances and appetite for risk.

Andrew Craig, founder of Plain English Finance, says: ‘One elegant way to think about how to approach investment as you go through life is by using the idea of 100 minus your age.

‘Traditionally this gave you a rough idea of how to split your pension and other investments between equities and bonds, based on your age, with the amount allocated to equities calculated as 100 minus your age. If you are 30, you might save and invest 70% in shares and 30% in bonds.  If you are 70, your allocation might be the other way round.’

What is important is not to have a knee-jerk reaction to short-term global stock market volatility.

‘A reactionary approach risks locking in any losses you have made. For those taking a flexible income through drawdown, sustained dips in the value of your fund, particularly in the early years of retirement, may require you to review your withdrawal strategy to make sure it remains on track,’ says AJ Bell’s Selby.

WHAT IS POUND COST RAVAGING?

Pound cost ravaging is a term used to describe the impact that a downturn in financial markets has on investment withdrawals.

We all know that if there’s a market drop our investments are likely to fall too, but the effect of this is far worse if you’re taking money out of your pension.

When you take money out of your pension you sell down your fund to generate income, unless you are withdrawing cash from dividend payments. Fund values change regularly and to generate a specific level of income you’ll sell down different proportions of your pension fund depending on its value.

When fund values drop, you need to sell a higher proportion of your fund to generate the same income. This will deplete your fund faster, shorten its duration, and reduce your ability to benefit from any market recovery. In the worst-case scenario, you could run out of money to fund your retirement and the impact is greater in the early stages of retirement.

For this reason, you might consider taking income from other savings or investments if you have them or relying on any income-paying investments you have in your portfolio – sometimes referred to as its ‘natural yield’ – and leaving the capital untouched.

A WELL THOUGHT OUT PLAN

Scott Gallacher chartered financial planner at Rowley Turton believes it is important to have a well-thought-out plan to counteract any market falls just before, just after, or midway through retirement.

‘It’s also worth remembering that for many clients, the recent market falls only brought values back to where they were, perhaps 12 months ago. It’s not a disaster – just part of the normal investment journey.

‘The real risk tends to come when large sums, like the 25% tax-free lump sum, are taken and spent or gifted early on. However, if the 25% was simply being withdrawn to reinvest elsewhere, the falls are largely irrelevant as those non-pension assets will also likely have fallen in value. It’s all still invested, just in a different wrapper.

‘That said, for those who had planned to take their 25% tax-free lump sum soon, it may be worth delaying if practical, at least until markets begin to recover.

‘Finally, if the recent volatility has made you uneasy, it’s worth asking whether drawdown is the right option for you.

‘Now might be the time to take a fresh look at annuities. Rates are significantly higher than they were just a couple of years ago, and while annuities fell out of fashion for many years, they’re very much back in vogue. For more cautious retirees-or those with less margin for error annuities can offer the certainty and peace of mind that drawdown may not.’

One issue with buying an annuity during periods of market volatility is, if you make such a purchase when the value of your retirement pot is diminished then you are, in effect, crystallising these losses and will get a reduced rate of income as a result.

A MULTI-ASSET INCOME STRATEGY

Darius McDermott, managing director at FundCalibre believes it is important to have a multi-asset income strategy: ‘It’s always frustrating to see volatility in markets, but these periods are an inevitable part of long-term investing. Hopefully, those approaching drawdown will have already de-risked their portfolios to some extent, so won’t be fully exposed to equity market falls.

‘It’s also worth noting that bonds have generally risen since the recent tariff concerns began, so it’s not all bad news. When drawing down a pension, one option investors might consider is a multi-asset income strategy. By generating a steady income stream from a diversified portfolio, it can help reduce the need to sell capital in tougher markets.’

It is important to reiterate that everyone’s individual circumstances when approaching retirement or in drawdown are different so before doing anything you should consider seeking financial advice.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Sabuhi Gard) and the editor (Tom Sieber) own shares in AJ Bell. 

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