Market volatility triggered by President Trump’s ‘Liberation Day’ tariffs is deeply unsettling for pension investors, many of whom are likely to have seen the value of their retirement savings plummet.
Trump yesterday confirmed that he would impose a “baseline” 10% tariff on all imports into the US, with a 10% tariff on UK goods and 20% on EU goods. Certain countries will face much steeper tariffs, sometimes as high as 50%. The Prime Minister Sir Keir Starmer acknowledged that there will “clearly be an economic impact” from the decisions taken by the US, and pledged to “fight for the best deal for Britain.”
Following Trump’s announcement, the UK’s FTSE 100 share index fell 1.5% and other European markets also dropped, with the Nikkei in Japan closing down nearly 3% and Hong Kong’s Hang Seng index falling by 1.5%. US markets have also been hit hard. In the first few moments of trading on April 3, the Dow Jones fell 2.8%, the S&P 500 was 3.3% lower, and the Nasdaq – which is predominantly made up of tech stocks – fell 4.4%.
Seeing the value of your pension and investments suddenly fall can be extremely worrying, especially if you’re approaching retirement, or you’re relying on pension drawdown to provide you with your retirement income.
Here, we explain what the tariffs mean for pension savers, and why it’s vital not to make any knee-jerk reactions when markets are turbulent.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
How does market turbulence affect different types of pension?
If you have a defined contribution pension, which includes most private sector workplace pensions, you’re likely to see the value of your pot take a dip due to current 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?
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: “Defined benefit pensions should be largely unaffected as their payouts are mostly fixed and guaranteed, but movements in interest rates can affect their transfer value, with higher rates generally meaning someone will be offered a lower sum to transfer out. As mentioned, the rates outlook is far from clear, but in any case, most defined benefit pension holders are best off retaining what is usually a very favourable pension arrangement.”
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.
Mr Hollands said: “It is easy to think about selling or switching to ‘safer’ assets when you see your portfolio go into the red but that is usually not the best policy. 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.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: “For those coming up to retirement, we could see people choosing to put off taking an income from their pension through drawdown until the situation is more settled. We could also see more people opt to go for a guaranteed income through an annuity.
“These are offering good value right now with the most recent data from our annuity search engine showing a 65-year-old with a £100,000 pension can get up to £7,626 per year from a single life level annuity with a five-year guarantee. This is the highest since unisex annuity rates were introduced in 2012. With the potential for interest rate cuts in the coming months and the impact on long-term gilt yields uncertain, we could see more people take the plunge now.”
You can learn more about current competitive annuity rates in our article Annuity rates jump to 16-year high – is now the time to buy?
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, your income from this will be unaffected by current events. However, the situation is less straightforward for those using drawdown to provide them with an income, 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.
Ms Morrissey said: “If you are in retirement and using income drawdown, we recommend a natural yield approach whereby you only take the income yielded by your investments. This means income can fluctuate. We recommend people keep one to three years of essential expenses in an easy access account to supplement their income during these times and avoid them eating into their capital.”
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.
Mr Hollands 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…
It might be tempting to pull out your pension savings when times are turbulent, 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.
If you’re not sure whether your pension investments are properly diversified, or whether they are still appropriate for you, you may want to consider seeking professional advice.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation* with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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