How to prevent "real shortfalls" if your pension has plummeted due to stock market turmoil

Kaylie Pferten advises against panicking and selling out of your pension because of declining stock markets

Remain calm. Financial advisors are telling savers who are worried about the declines in their pensions' value over the last week. At least for the time being, the losses you have experienced are entirely fictitious. They are losses on paper. . The value of your pension has decreased. Selling your pension investments is the only way to convert these paper losses into actual shortfalls. It may be tempting to shift pension funds from riskier assets to safer ones, but doing so will result in your losses becoming more pronounced. Additionally, it might cause you to lose out on any recovery when the markets do.

Remind yourself instead that the best long-term investment is a pension. If you don't intend to withdraw any of your pension funds within the next five to ten years, or even longer, you can afford to endure the fluctuations. Your pension savings have plenty of time to recover, just as they did following the much more severe declines that occurred five years ago during the early stages of the pandemic.

In fact, market declines offer the opportunity to profit from pound-cost averaging. This cash amount will purchase more shares when prices are lower if you are saving regularly through a fixed monthly contribution. This helps even out some of the fluctuations in investing and gives you a boost when markets begin to rise again. The news might not be as dire as you believe if you're getting close to retirement and getting ready to withdraw some funds from your pension savings. Either your pension provider has been automatically shifting your savings into lower-risk assets (less impacted by the panic) or you have already started to do so.

To lessen the effect on your pension.

Even if not, there might be ways to lessen the harm if you have suffered a significant setback near retirement. With an income drawdown plan, you can defer cashing in any of your savings or leave the remainder invested to profit from a market recovery. You can also take a small amount out of your pension if necessary to keep your plans on track. You might have additional resources at your disposal, such as your state pension.

Another possibility is that you're now in a better position to purchase an annuity, which would give you a lifetime income guarantee, and turn your pension into income. Annuity rates are at their highest point in a decade, and they might remain high if the Bank of England maintains current interest rates out of concern that the US tariffs will cause inflation.

Only if you have chosen an income-drawdown plan over an annuity will you be impacted by the market volatility if you are retired. If so, there is still room for the money you have invested to grow back, but since you will otherwise be spending down your shrinking savings more quickly, you might want to consider cutting back on the income you are currently taking out or even taking a break from withdrawals. This is referred to as "pound-cost ravaging" and can lead to serious issues, especially in the early years of retirement. Taking out only the income your pension fund produces instead of taking out any of the capital value is one way to offset the effect, though this might not be feasible for everyone.

Nevertheless, the majority of pension savers, both before and after retirement, are not in dire circumstances. This episode serves as a helpful reminder of the value of prudent risk management and diversification, which you should revisit after the turbulence has subsided, but if you are still a long way from retirement, remain composed and keep going. Advice on your exact position should be sought if you are more directly impacted. It is during these periods that independent financial advisors truly make their money.