In our weekly series, readers can email in with any questions about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at money@theipaper.com.
Question: I think the situation in Iran has affected my pension. I’ve seen rolling news about its impact on stock markets, and I’m wondering if I should be doing anything.
Answer: Given the scale of the instability we are seeing in the Middle East – and specifically the knock-on impact on oil supplies and global confidence – there will inevitably be a short-term impact (at the very least) on people who are invested in global markets, which includes anyone with a defined contribution (DC) pension.
If you have a DC pension – either set up through your employer or privately – you will likely be invested in a diversified portfolio of stocks, funds and bonds, with the aim of delivering positive returns over the long-term.
Even if you have been automatically enrolled into a workplace pension scheme and have done nothing, your money should still be invested in a ‘default fund’ (an investment portfolio chosen by your employer designed to be broadly appropriate for its employees).
We have already seen wobbles in global stock markets as a result of the US and Israel launching attacks on Iran, meaning there is a fair chance that if you log into your account to see your performance, there will be a dip in the last week or so.
But whether you’re young and saving for retirement in decades or have already started taking an income from your pot, a short-term hit to your investment value shouldn’t be a cause for alarm. When markets go through tough patches such as now – and as we have seen plenty of over the last decade – it’s important not to get swept up in a wave of panic.
While we don’t know if the Iran war is going to be a short-lived event or prolonged, it is always prudent to give your portfolio a health check to ensure that you’re happy with the shape of it and the risks you are taking.
Spreading these risks across sectors, geographies, and asset classes (such as bonds and gold) could help to limit any blows. History suggests that staying invested is a better course of action than trying to time when to go in and out of the market.
If the idea of picking your own investments is a bit daunting, most firms now offer ready-made portfolios aimed at different risk preferences.
If you are taking a retirement income while keeping your pension invested through ‘drawdown’, it’s worth using the current uncertainty as an opportunity to review your strategy to make sure it remains sustainable.
If your investments have taken a big hit, for example, you may need to reduce the amount you take out of your pot to ensure you aren’t risking running out of money in retirement.
If you are lucky enough to have a defined benefit (DB) pension, where you receive a guaranteed income from your ‘normal retirement age’ based on the number of years you are a member of the scheme and your salary, what is happening in Iran should not have any direct impact on your retirement plans.
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If the employer responsible for paying your DB pension went out of business for any reason, provided there are sufficient funds in the scheme to pay pensions, you should not be affected. Where there aren’t sufficient funds, there is a compensation scheme – the Pension Protection Fund or PPF – that acts as a safety net and ensures you will not lose everything (although your retirement income may be reduced).
Finally, your state pension entitlement should also not be directly affected by international conflicts like this – although clearly there could be ramifications for public spending in general, including the state pension, if the UK is forced to increase the funding for defence.
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