You may have read stories in the news about the impact of recent events on pensions. We explain some of the key things you need to know.
Your questions answered
There are a lot of news stories about pensions being in trouble. Should I be concerned?
These stories relate to a type of pension scheme called ‘Defined Benefit.’ While these are still offered to some public sector workers, these are largely historical pension schemes which were offered by larger employers in the past, but most of which are closed to new members today. They promised a regular pension payment in retirement that was based upon the employee’s years of service and their salary. To meet these promises, pension schemes need to hold sufficient investment assets to enable them to meet the cost of these pension payments when people come to retire. The concern is that the investment strategies followed by many of these schemes have forced them to sell some of their existing assets at low prices, and that they may no longer be sufficient to pay the pensions promised to members. In practice, there is a great deal of activity underway to ensure that this doesn’t happen, and employers will need to make good any shortfall where they can afford to do so.
Is my pension affected?
No, if you have a pension policy with Royal London – either with your adviser or through your employer – this works differently. It is often referred to as ‘Defined Contribution’, where there is no guaranteed pension payable in retirement, but instead your savings are invested and benefit from any returns made on those investments over time. While the value of your pension is affected by short term changes in markets, they do not run the risk of becoming ‘insolvent’ in the way some news articles have reported. It is important to remember that pensions are a long term investment. If you are still making payments into your pension, market volatility can even be of benefit, as you are effectively buying your investments at lower prices than before.
Should I switch my investments to funds that are less volatile?
While this is always an option, it can be detrimental to the value of your policy in the long term to switch out of market investments when there is so much volatility. We would strongly advise that you speak to an independent financial adviser before making any decisions.
I am no longer paying into my pension and I am now withdrawing money, or thinking of doing so. How am I affected?
If you are withdrawing money from your pension policy, or considering doing so, the situation is a little more complicated. Making large withdrawals while markets are volatile could have a detrimental effect on your retirement savings over the long term, as you may be effectively selling your investments at a lower value. We would strongly advise you to speak to an independent financial adviser if you are unsure what to do.
What is Royal London doing to protect my investments?
While we cannot control what is happening in markets, we continue to actively monitor the effect on investments and we will take action to try and mitigate extreme volatility and target good investment returns over the long term.
