I am very disappointed with the performance of my pension fund which I would like to bring to your attention in the hope that you can give me some suggestions as to what I can do to cover some of my losses.
I am 66 years old, I retired in September.
Earlier in my career I contributed to a defined contribution pension scheme. When I stopped contributing as a result of moving to a new job in 2014, the value of the fund was £22,507.
In early 2021, I told the program that I wanted to defer my pension until my 67th birthday in 2023.
In November 2021 the value of the fund was around £35,000. In June 2022 the value of the fund fell to around £25,000 and today it is worth £23,089.
Retirement Dilemma: I’m 66 and my fund has collapsed, wiping out almost all of my earnings over the last eight years
Part of the reason for choosing this pension was that six years before my retirement, my investments should have been moved to less risky areas to protect the value of the fund and provide more certainty about the value of my pension as I approached retirement.
Apparently, this is called the road to retirement.
I have spoken to pension representatives several times but have been so frustrated with their response time (despite promising to get back to me with answers, two people have not) that I have now lodged a formal complaint.
I have changed some of my finances and deferred my pension until my 70th birthday in 2026 in the hope that the fund can cover some of its losses.
I did consider using the fund but decided against it as I thought I was only crystallizing my losses. Do you have any other suggestions as to what I can do?
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Steve Webb replies: We’ve heard from a lot of This is Money readers who are angry or just confused about what happened to their pension fund this year.
I completely understand how devastating this is for many people.
In this column, I’ll try to explain a bit more about what’s going on, although I’m afraid there are some simple answers to remedy the situation.
Steve Webb: Find out how to ask the former pensions minister about your retirement savings in the box below
Your question is primarily about pre-retirement investing. In this case, the right approach depends on what you plan to do with your money in retirement.
In the past, and particularly before the introduction of ‘pension freedoms’ in 2015, most people used their pension ‘pot’ to buy an annuity which provides guaranteed income for the rest of their lives.
When you plan to buy an annuity, pension providers usually gradually change the composition of the investments in your pension as you get closer to retirement, in a process known as ‘lifestyle’.
This involved switching to investments more similar to those the annuity provider would use – usually government bonds or similar.
The point of this was not to completely de-risk, but to match what is happening with annuities.
For example, if you were fully invested in government bonds a year ago, even though the value of your bank would have plummeted, the annuity rate you could buy with that bank would have skyrocketed, and overall you might not have lost out in terms of your expected retirement income.
In fact, annuity rates are at a level that hasn’t been seen in more than a decade.
The problem arose when people who weren’t planning to buy an annuity found themselves on the “glide path”, which involved switching from higher-yielding/higher-risk assets such as stocks to gilts and other forms of bonds.
The intention is to make the size of your bankroll more predictable when you retire, but it didn’t work in your case. It’s a shame your ISP didn’t check your intentions with you when you spoke to them in early 2021.
If your pension provider gave you the right answer, they might point out that the strategy they use is more suitable for investors looking to buy an annuity.
They could argue that investing in government bonds has actually been a relatively stable way to invest over the years.
Evidence for this statement is provided in the table below, which shows the Bank of England’s “base rate” interest rate for the decade following the 2008 global financial crash.
As you will see, interest rates were cut in an attempt to stimulate the global economy in 2008/09, but they have been remarkably stable since then.
Throughout this period, investing in government bonds would appear to be a low-risk (and low-yield) way to allocate a portion of your retirement fund.
Unfortunately, your investments were hit last year by two once-in-a-generation black swan events:
– War in Europe, because Russia’s invasion of Ukraine contributed to the fall of the stock markets and the growth of global inflation;
– The UK’s disastrously misjudged ‘mini-budget’, which undermined confidence in the UK government and sent values plummeting.
Many readers have said in their questions that they feel their investments are risking “too much”.
If this means that less money had to be invested in the stock market, then it would really mean that you would have less losses this year.
But as you said in your question, for several years from 2014 to 2021, your investments grew steadily year-over-year, and that was almost certainly due to your investments in the stock market.
You could take less investment risk and avoid downside risk, but you’d also miss out on years of investment growth.
Like government bonds, it seemed like a relatively safe way to invest for many years, and few anticipated these developments.
It’s tempting to think that the answer to all of this is to get out of the markets altogether and put your money in a cash account. But with high inflation and a relatively low savings rate, the only thing it does is guarantee you a real loss year after year.
As you said, if you pull out now, you’ll just “lock in” the losses you’ve incurred and lose the opportunity to recover.
Indeed, anyone who cashed in a few weeks ago would have missed the modest recovery that has occurred since then.
Where your bank goes down significantly and you are close to retirement, your options are limited.
While I don’t know your individual circumstances, there is something to be said for deferring your pension (as you did) and giving it a few years to recover instead.
For those who can work a little longer, it also allows them to rebuild their retirement finances.
There is also the option to defer taking the State Pension, which results in a 5.8 per cent increase in retirement income for each year of deferral.
Another option would be to consider whether using part of the bank to secure an annuity might be more attractive now, given the recent sharp rise in rates.
While the recent turbulence in stocks and bonds was unexpected, the whole experience is a reminder to all investors to make sure they know how their money is being invested.
In particular, they should ensure that the investment approach adopted is well suited to their risk tolerance (take no more risk than the investor is comfortable with), their ability to bear losses (not risk that a downturn could leave them short of money for basic necessities ) and, importantly, matches how they plan to access their money.
Ask Steve Webb a retirement question
Former pensions minister Steve Webb is a cash-strapped uncle.
Whether you’re still saving, quitting your job, or juggling your finances in retirement, he’s ready to answer your questions.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner in the actuarial and consulting firm Lane Clark & Peacock.
If you want to ask Steve a question about pensions, email him firstname.lastname@example.org.
Steve will do his best to respond to your message in the next column, but he won’t be able to reply to everyone or correspond with readers personally. Nothing in his answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pension help to the public. It can be found here and his number is 0800 011 3797.
Stevee gets a lot of questions about state pension forecasts and COPE – Contractual Pension Equivalent. If you write to Steve about this topic, he answers a typical question from a reader here. It includes links to several of Steve’s previous columns on state pension projections and contracts that you may find useful.
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