The heavy falls and subsequent rebound in global stock markets is another reminder that volatility is par for the course when it comes to investing your pension.
Those taking advantage of the pension freedoms or with workplace pensions and approaching retirement can breathe a sigh of relief, as global stock markets have regained their poise and shaken off the heavy losses experienced during the final three months of 2018.
As a result, occupational pension funds have bounced back, more or less recovering from the biggest quarterly losses racked up since the global financial crisis. Figures from Moneyfacts show the average pension fund fell by 7.3% in the final three months of 2018, but in the first quarter of this year produced gains of 6.7%.
The falls and subsequent rebound serve as a reminder that that volatility is part of the deal in investing in equities. It is the price investors pay for the fact that over the long run, putting money into shares rather than leaving it in cash will yield greater rewards.
This marked the best quarterly performance for pension funds for over two years.
In contrast, annuity income fell marginally, with income from a standard, level annuity without guarantee for a 65-year-old in good health with a £50,000 pension pot declining by 1.8%. Low gilt yields have played a big part in annuity rates being at historically low levels. Most providers buy this type of bond to provide the fixed income they pay to policyholders.
Richard Eagling, head of Pensions at Moneyfacts, says: "While 2018 was a difficult year for pension fund performance and drawdown investors, it was a relatively calm year for annuities. However, the respective fortunes of the different areas of the retirement market can quickly change, as seen in the first quarter of 2019, with annuity rates once again falling."
While annuities are inflexible and the level of income on offer remains historically low, they do offer something investments cannot promise – income security. For those who do not have any other assets to draw on – for instance, a final salary pension or investments held in an ISA or elsewhere – annuities are worth considering to secure essential spending and living costs.
Kay Ingram, director of Public Policy at LEBC, the retirement adviser, endorses this approach:
"Annuities should not be rejected out of hand. Instead, they are a very useful tool in covering basic income requirements, whereas the rest of the money can be invested for discretionary spending."
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