Stock markets around the world have been falling this week and journalists have been asking the rhetorical question “why should you be concerned?” Their answer to their own question is almost invariably wrong.
Their answer is typically 1) your pension fund invests in shares so your pension will not be worth as much, and 2) if you are close to retirement your pension pot will buy less retirement income.
For the vast majority of people, neither of the above consequences of falling stock markets should lead to any concern at all.
- If you are in a Defined Benefit Pension Fund then your pension is determined by years of service and salary levels NOT the stock market.
- If you are in a Defined Contribution Pension Fund and do not intend to buy an annuity then falling markets become an opportunity to BUY shares at cheaper prices – a Black Friday (shopping) event!
Of course, there are certain situations when falling share prices can have a direct impact on your financial health.
1. you are at the point of retirement and DO want to buy an annuity;
2. you are at the point of retirement and want to take some cash but your pension pot is invested 100% in shares and therefore some must be sold;
3. you decide to take your 25% tax free cash and because the remaining 75% invested in shares has declined in value the amount you can withdraw tax efficiently is reduced.
4. you are taking a regular income from your Income Drawdown account but do not have sufficient cash to make the payments.
You can reduce the impact of 2 and 4 by simply holding sufficient cash ahead of time to make these planned payments. If you are in situation 3, you may decide to accept the relatively small amount of tax relief lost OR wait to see if stock markets recover (but remember, market timing is fiendishly difficult).
If you are on the verge of buying an annuity don’t forget that in most circumstances this decision is irreversible. Annuities are becoming better value as interest rates rise and share prices might recover – can you wait?
At the time of writing this article, stock markets are continuing to fall. Will today be reported as a “Black Friday” for shares? If you have cash, the next few weeks could be the time to consider further investment.
You can read more about why cash is the secret to financial health in the article “Cash is the secret to financial health” first published by Booming Lives three years ago.