Coronavirus led many pension savers to cash out as markets fell, but they may now have smaller retirement pots.
Pension savers who held their nerve through stock market falls in March have been rewarded by a reverse in fortunes in the second quarter.
The average pension fund lost 15.2% during Q1 in the worst quarterly performance on record, affecting the value of many retirement pots.
Many defined contribution pension savers panicked and cashed out all or part of their pots in an effort to cut their losses. These deals allow withdrawals in cash from the age of 55, unlike defined benefit pensions.
But pension funds bounced back by 13.3% in Q2, recovering much of that lost ground, according to financial data firm Moneyfacts.
Richard Eagling, head of pensions at Moneyfacts, says: “One of the big concerns in the retirement market is that the coronavirus pandemic could influence the behaviour of retirees and adversely affect their retirement income decisions.
“It is fair to say that how drawdown customers have responded to recent events could prove decisive in how sustainable their retirement incomes will turn out to be.”
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Former pensions minister Steve Webb, partner at Lane, Clark & Peacock, says: “It’s a reminder that if you react to a market crash by cashing out, you lock in your losses.
“If you never logged into your pension account between the first of January and now, you missed a pretty big V shape. As long as you did nothing, most of what you lost, you recovered.”
In March, the Financial Conduct Authority and The Pensions Regulator did urge retirement savers to stay calm as markets fell.
But some of the rush to cash out pensions may have been driven by financial regulation. This orders financial advisers and asset managers to write to people alerting them when assets go down more than 10%.
Webb says this “may have been counterproductive”.
“It’s human instinct to think, ‘I’ve got to get my money out of there’”, he says. “But that might well have been the very worst thing to do.”
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However, despite the Q2 rally, pensions values are still 4.4% lower than at the start of the year. Additionally, average retirement income is 11.9% lower than a year ago.
The coronavirus pandemic has particularly hit those who want to use their retirement pots to buy an annuity, a guaranteed set yearly income for the rest of their lives.
The average annual standard annuity income for an individual aged 65 rose by 0.7% in Q2, but this is still 5.3% lower than at the start of the year and 11.9% lower than a year ago.
The top three Association of British Insurers pension sectors were commodity/energy (37.5%), North America (22.9%), and Europe Excluding UK equities (21.1%).
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