Is my pension safe? What does the market turmoil mean for your retirement savings

After weeks of financial turmoil, you could be asking if your pension is safe. We explain what recent events means for your retirement pot - and the rules and regulations in place to protect you

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(Image credit: Matt Cardy / Getty images)

Many pensions have suffered stock market losses since September’s mini-budget, the Bank of England’s emergency bond-buying plan and the sacking of Kwasi Kwarteng

In a nutshell, your pension is shielded from recent financial turmoil by regulation but, if you're close to retirement age, you might need to rethink your retirement plan. 

Weeks of uncertainty were triggered by the market reaction to the uncosted mini-budget, forcing the Bank of England (opens in new tab) into buying £65 billion of government bonds (government debt) on 28 September to avoid certain pension funds collapsing. 

The pound then plunged on 11 October when the central bank announced its emergency bond bailout would end - followed by whispers it will continue after all. 

While it’s not certain the emergency statement from the new Chancellor Jeremy Hunt has calmed markets, there are signs it has helped: the pound rallied against the dollar while bond yields fell significantly. 

Which is good news for pension savings and economic stability.

But different types of pension schemes come with different risks and different protections. We explain what these chaotic events mean for your pension savings and what you can do if you’re near retirement but see a drop in the value of your pension.

How the bond-buying programme affected pensions

The Bank’s move to buy government bonds - known as gilts - was designed to support defined benefit (DB) pensions, such as final salary schemes. These schemes are common in the public sector, for example teachers, nurses and local government workers have defined benefit (DB) pensions. A small number of private sector employers also offer them.

These types of pension schemes invest heavily in gilts, because they are normally a stable investment. But as their value plummeted at the end of September, concerns grew over pension funds' solvency, prompting fears they would have to sell off other assets, such as stock market shares.

David Gibb, chartered financial adviser at the wealth manager Quilter (opens in new tab), comments: “The reasons and mechanics of the [bond-buying programme] are very complex, but basically it was needed to provide liquidity for DB pension funds, as they were facing a similar situation to what happened to Northern Rock during the credit crunch.”

Becky O'Connor, head of pensions and savings at the investment platform interactive investor (opens in new tab), explains that DB schemes had been under significant pressure to generate cash quickly, risking a vicious cycle where they would have had to sell more gilts, reducing prices further. 

She adds that it was “another alarming unintended consequence of the mini-Budget”.

Final salary pensions

Despite recent difficulties, final salary pensions still offer the best protection against market turmoil.

Savers or retirees with a DB pension, like a final salary pension, do not need to do anything. They are not able to make decisions about how the pension fund is invested, instead it is up to the pension fund trustees to navigate the market turmoil.

This was made easier by the Bank of England’s intervention aimed at stopping bond prices falling too far - especially important for DB pensions as they are more invested in government bonds so are more exposed to falling bond prices. 

Meanwhile the Pensions Regulator closely monitors financial markets.

Any investment decisions by trustees - such as selling of gilts - also won’t directly affect members’ pensions. This is because DB pensions pay an income in retirement based on your salary when finishing work, regardless of how much the pension scheme is worth.

If the employer running the DB pension scheme was to go bust, the scheme would fall into the Pension Protection Fund (opens in new tab).

Mick McAteer, a former board member of the Financial Conduct Authority, explains: “The Pension Protection Fund (PPF) means if a company goes bust, PPF pays 100% of the pension of those in retirement. But, if a company goes bust before members retire, only 90% is paid. If the employer is solvent and can fund a recovery plan then employees should be OK.”

Nathan Long, Senior Analyst, Hargreaves Lansdown: “People who are members of DB pension schemes do not need to worry – this is a problem for your employer to resolve, not you. In defined benefit schemes it is the employer who is ultimately responsible to make up any shortfall in the funding of the scheme, not you.”

Defined contribution pensions such as a workplace or personal pension

The Bank’s emergency bond-buying programme did not directly affect defined contribution (DC) schemes like personal pensions, self-invested personal pensions and modern workplace pensions.

So, while these types of pensions suffered stock market losses very recently, savers with a DC pension should continue to save into them and manage their pension pots as normal. Remember that pensions are a long-term investment so there is usually time to ride out any market falls and for the value of the pension to bounce back.

Gibb adds that most pension pots will predominantly hold shares, rather than bonds. “It is important not to panic, and despite it being hard, just sit tight and ride out the storm. And remember that this is a UK storm, and most pensions will be diversified geographically.”

But, savers near retirement might want to pause for thought as some or most of their funds will have been typically moved into bonds - meaning recent weeks will have damaged the value of their pension. 

We explain the options to consider below.

I’m planning to retire soon. What should I do with my pension?

Pension savers near retirement are likely to have more bonds in their pots, compared to younger savers who typically hold more shares.

This means your pension may have fallen in value recently. Gibb explains: “Now is the time to review your pension and check whether you still can afford to retire. 

The biggest issue is that those close to retirement will almost certainly have a chunk in gilts in their pension pots, and the value of these have suffered significantly due to increasing interest rates. Partial retirement may be worth doing while we wait and see how the markets recover.”

One silver lining of rising interest rates is that annuity rates have increased recently, giving retirees bigger incomes.

An annuity is an insurance product that pays a fixed income for the rest of your life in exchange for your pension. This is in contrast to income drawdown, which allows you to take cash from your pension pot as you please. 

Annuity rates are now at their highest level in a decade, after rising by 35% over the past year.

Options to consider include: working for a bit longer in order to keep contributions and tax relief up and add to your pot while investment prices are low, buy an annuity or find a hybrid way by buying an annuity with some of your pot and investing the rest.

Alistair McQueen, head of savings and retirement at the pension provider Aviva (opens in new tab), comments: “My top three tips remain the same: keep calm; focus on the longer term; and get expert help if you are considering significant action.”

Thinking about stopping your pension payment? See what the former pensions minister Steve Webb says first in our article - Why stopping pension contributions to ease the cost of living crisis could be a big mistake.

Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.