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Escalating conflict in the Middle East has rattled global markets, and many pension savers may already have seen the value of their retirement savings fall.
Stock markets dropped sharply on Monday morning following rising tensions over the weekend. The FTSE 100 Index, which tracks the UK’s largest companies, fell around 200 points to 10,087 within the first hour of trading.
Inflation fears also pushed UK government borrowing costs up sharply, with the yield on two-year gilts nearing its highest level since former prime minister Liz Truss’s disastrous mini-Budget in 2022.
When investors sell government bonds, their price falls and their yield rises. This matters for pension savers because many retirement funds hold large amounts of bonds. This is particularly relevant for those invested in lifestyling funds, where your savings are gradually moved out of shares and into lower-risk assets, typically bonds and cash, as you approach retirement.
This shift usually begins between five and 15 years before your chosen retirement age, although the exact timing varies depending on the provider and the fund.
Richard Hunter, Head of Markets at interactive investor, said: “The mood is darkening among investors as the possibility of an extended conflict increases. The main US indices ended last week sharply lower again, as traders de-escalated their risk positions ahead of the weekend.
“As it turns out, this proved to be a wise move, since further targeted attacks resulted in a surge in oil prices on Sunday by as much as 30%, and even though the price has since moderated, it remains comfortably above the perceived pain point of $100 per barrel and up by 75% in the year to date. The possibility of stagflation – a toxic mix of slowing growth and rising inflation – or even recession are currently on the minds of increasingly concerned investors.”
Markets remain extremely volatile, and seeing the value of your pension and investments suddenly drop can be very worrying, especially if you’re approaching retirement or are relying on pension drawdown to provide you with retirement income.
Here, we explain what the Middle East conflict means for pension savers and why it’s vital not to make any knee-jerk reactions when markets are turbulent.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
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How does market volatility affect different types of pension?
If you have a defined contribution pension, which includes most private sector workplace pensions, you may have seen the value of your pot dip due to recent market volatility.
With this type of pension, the amount you receive when you retire depends on how much you have paid into it, how much your employer has contributed (if it’s a workplace pension) and how the investments made on your behalf have fared. You can learn more about how defined contributions work in our article What is a defined contribution pension?
If you’re lucky enough to have a final salary or defined benefit pension, however, this week’s market volatility isn’t likely to have a significant impact on your retirement income. That’s because a special formula is used to calculate your retirement income, which is based on a proportion of your final year’s pay, multiplied by the number of years you’ve belonged to the scheme.
As with other pension schemes, your defined benefit pension scheme provider will use the money placed with them to invest in various stocks and shares, bonds, and other assets. However, unlike a defined contribution pension scheme, where you might get back less than you put in when you reach retirement, with a defined benefit scheme, the risk lies with your employer. It is their responsibility to provide you with the income promised at the outset, regardless of how their investments have performed. You can learn more about final salary schemes in our guide What is a defined benefit pension?
Should I switch into safer assets?
If your pension has fallen in value, you might be tempted to sell your current investments and move into safer assets. However, doing so will result in you turning any paper losses into real ones, so experts recommend holding fire for now.
Amid uncertainty and periods of turbulence, sometimes the best course of action is to take a few deep breaths, sit tight and wait for the dust to settle rather than make knee-jerk decisions.
A portfolio that was already well positioned ahead of this would include gold, some value stocks in more defensive sectors and government bonds, and would be having less of a rollercoaster ride than one devoted to growth stocks. That’s the case for always consistently having a well-diversified portfolio, rather than trying to cobble one together in haste when markets are very volatile and may well remain so over the coming days.
What if I’m just about to retire?
If you’re approaching retirement, try not to panic, although, of course, this is easier said than done. You also shouldn’t suddenly stop contributing to your pension, as paying in regularly enables you to benefit from market downturns by being able to buy more units when prices are low.
As mentioned, lower bond prices can be bad news for those whose pensions are invested in ‘lifestyling’ funds. The logic behind lifestyling is that, as it reduces your exposure to the ups and downs of the stock market, this should hopefully avoid the risk of your pension savings plummeting in value just before you need them. However, recent bond market volatility has essentially flipped that wisdom on its head, with bond investors now nursing losses as a result of the latest sell-off.
Commentators are urging pension savers not to panic, but current turbulence should serve as an important reminder to regularly review where your pension savings are invested.
Those coming up to retirement might decide to put off taking an income from their pension through drawdown until the situation is more settled. It’s possible more people may opt for a guaranteed income through an annuity.
According to Hargreaves Lansdown’s annuity search engine, a 65-year-old with a £100,000 pension can get up to £7,712 per year from a single life level annuity with a five-year guarantee. You can learn more about annuities in our article Annuities explained. If you’re not sure which route to take at retirement, seek professional financial advice on the best option to suit your individual circumstances.
What if I’m already retired?
If you’ve already retired and have used some or all of your retirement savings to purchase an annuity, the amount of income you receive from this will be unaffected by current events. However, many expect living costs to increase due to the current conflict, especially as the pound has fallen in value.
Nigel Green, chief executive of deVere Group, said: “Energy becoming more expensive globally and the weaker pound means Britain pays even more for imports. Oil and most commodities are priced in dollars. A softer pound, therefore magnifies the impact of rising global prices. Households feel it at petrol pumps, in energy bills, and through higher prices in supermarkets.”
Those using drawdown to provide them with an income in retirement face more of a dilemma right now, as their money remains invested and is therefore likely to be impacted by market fluctuations.
Pension drawdown – sometimes known as flexible drawdown or flexi-access drawdown – enables you to leave your pension savings invested once you retire, and draw an income from them when required. You’re also free to take a 25% tax-free lump sum out if you want to. Learn more in our article What is pension drawdown and how does it work?
How can I protect myself from market volatility in future?
There are several steps that investors can take to lessen the impact on their pension savings if market volatility happens in the future when they are on the verge of retirement.
Jason Hollands, managing director at Bestinvest, said: “For the majority who are not confident with investment management, the potential risks we see here are a reminder that ongoing advice can be the answer once a substantial pot has been built up – even if retirement is far on the horizon. Even for those who want to go it alone for most of their working life when they are accumulating funds into their pension, advice can be hugely beneficial when it comes to decisions on how to access their funds, how to keep the pot invested as they draw down on it, and how to plan their retirement.
“Those who want to go it alone can make sure they diversify investments as the years go on towards retirement. When they are five years or so from the date when they want to start accessing funds, it is usually a good idea to take some risk off the table by raising exposure to more stable assets like government bonds and to start devoting some of the pot to cash or cash-adjacent investments. This means that they will then be able to take their tax-free cash and/or their first year or two of income from that portion of the pot rather than having to sell equities that have recently fallen in value.”
If you’re not sure where your pension is invested, it’s vital to check so you can be certain that your investments align with your financial objectives and your approach to risk. Find out more in our guide Where is my pension invested?
A final thought…
Beyond the financial markets, it’s important to remember that escalating conflict in the Middle East has a deeply human cost. Civilians in affected areas face displacement, loss of homes, and the threat of injury or death. While pension savers understandably worry about their retirement funds, acknowledging the wider humanitarian crisis helps put market turbulence in perspective.
It might be tempting to pull out your pension savings when markets are volatile, but this could be the worst thing you do. Taking a long-term approach and remaining invested in spite of highs or lows is more likely to help you achieve the outcome you want, even though it can be nerve-wracking.
For tips on managing challenging times such as these, read our article Four ways to weather stock market storms. If you’re not sure whether your retirement savings are affected by current volatility, or you need help deciding whether an annuity or drawdown is right for you, you may want to seek professional help.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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