The ongoing conflict with Iran could affect UK pension pots, experts warn, as the escalating war jolts global markets.
Oil prices have been sent skywards whilst stock markets around the world have seen major volatility, forcing experts to reassess the outlook for inflation and interest rates.
That turbulence can ripple through the savings and investments millions in the UK rely on for retirement.
Here, The i Paper looks at how the conflict could affect UK pensions – and what it means for savers.
How global conflict can impact pensions
Pensions may feel far removed from geopolitical crises. Still, the effects from conflict involving Iran can quickly reach retirement savings in the UK and the investments many hold their savings in.
When tensions rose, one of the first reactions in global markets was a jump in oil prices – largely because of the strategic importance of the Strait of Hormuz, through which a large share of the world’s oil exports travel.
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The Iran conflict drove Brent crude oil, the international benchmark, by 17.65 per cent this week to over $85 (£64) per barrel – the biggest jump since March 2022, after Russia invaded Ukraine.
Higher energy prices can feed through to inflation expectations and increase uncertainty about global growth.
Investors respond by moving money between assets such as equities [shares of ownership in a firm], bonds, currencies and commodities, creating the volatility that pension savers sometimes see reflected in their retirement pots.
This is because the value of the money they have invested can be affected and may show some downward movement.
Adam Cole, retirement specialist at Quilter, said: “The conflict in Iran has added another layer of uncertainty to markets, and pensions are feeling the effects through higher volatility and a shift in expectations for interest rates and inflation.
“Markets have moved quickly to price in a riskier global backdrop, and that influences everything from gilt yields to equity valuations, which ultimately shapes pension performance.”
The Bank of England base rate is currently 3.75 per cent, whilst inflation is at 3 per cent.
Whilst it was widely expected that there would be at least one cut in interest rates this year, to 3.5 per cent, if not more, predictions are now suggesting there could be none.
Some sectors have been hit harder than others, such as airlines and travel companies, which have come under particular pressure as fuel costs rise and airspace disruption affects routes in the region.
But Jason Hollands, managing director of BestInvest, said these sectors usually account for a relatively small share of pension portfolios, limiting their overall impact on most savers.
Pension funds typically spread investments across a wide range of sectors, geographies and asset classes, which helps reduce exposure to shocks affecting a specific industry.
Who will be worried the most and what they can do
The impact of the market movements will depend on how long you have until you need to access your money.
One of the groups perhaps most concerned will be those fast-approaching retirement whose pensions are heavily invested in the stock market.
That is because sharp market drops at the point someone plans to draw their pot could “jam a spanner into the gears of your well-laid retirement plans”, Craig Rickman, personal finance expert at interactive investor, said – especially those who are set on buying an annuity.
He added: “Your savings may not have time to recover any losses, reducing how much guaranteed income you can secure.”
If this applies to you, now is a good time to check that your investment strategy is suitable for your preferred way of taking retirement income and build flexibility into your plan should things get worse over the coming weeks and months, he said.
Having a “plan B” in place can also help calm the nerves when making crucial decisions with your retirement savings.
Clare Moffat, pensions and tax expert at Royal London, said: “If you’re getting closer to retirement and you do notice a drop in your pension fund, you might want to think about delaying taking any money out of your pension and carrying on working for a little while.
“But that might not be an option for everyone. If your plan is to take tax-free cash and then move the rest into drawdown and take monthly income from that, being careful about how much you take out in drawdown income could be a good idea too.”
If you have longer until you need to withdraw funds, then experts say not to panic.
Ed Monk, Pensions and Investment Specialist at Fidelity International, said: “Anyone still with many years until they need their pension money – at least 10 years – can probably afford to relax more in response to these developments.
“If your pension investments lose value in the short-term, there will be plenty of time for those losses to be recovered. What’s more, if you still have many years of pension contributions ahead of you, losses now can actually work in your favour because they allow you to buy assets at lower values. This can boost your returns in the long run.”
For those who are already in retirement with a fund still invested, Monk said temporarily reducing the amount of income taken from a pension may be a useful way to lessen the effect of market activities.
“If investors can push through the short-term downturn by doing this and benefit from an eventual recovery, there is the chance to navigate uncertainty without eating into your capital.
“Withdrawing a fixed amount in this current environment will erode savings quicker if your investments are down. If you can live off the natural yield, this may be more suitable because it won’t deplete the investment itself, and when the market does turn around, the capital will still be there.”
But experts stress that savers should not panic or make rash decisions.
Hollands wanted to reassure savers that, while unsettling, market turbulence triggered by geopolitical crises is often relatively short-lived.
He said: “We saw this last year following President Trump’s ‘Liberation Day’ tariff announcements, when markets initially sold off sharply before stabilising and then rebounding sharply to reach new highs.
“For long-term pension investors, reacting hastily to dramatic headlines can be counterproductive.
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“Pension funds are designed to be diversified and resilient, with exposure across regions, asset classes and currencies.
Unless the conflict escalates into a prolonged disruption of global energy supply or draws in additional major powers, the impact on most UK pension portfolios is likely to remain manageable, he said.
Hollands added: “Maintaining a long-term perspective and a well-diversified strategy remains the most prudent course of action for pension savers.”
Seeking advice from a financial advisor can help people decide what the best decision is for them.
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