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Teresa Hunter Tells Investors How To Salvage Their Battered Retirement Plans


The Scotsman

September 21, 2008 




Consumers are withdrawing cash from their pensions in unprecedented numbers as the stock market rollercoaster sends their retirement plans reeling.
The 17 million employees who save with a pension will last week have been hit by a sick sinking feeling, as they at one point watched 73bn knocked off the value of their funds, having already suffered a 130bn dip since May.

Many will now have to work longer or reorganise their retirement, according to Hargreaves Lansdown's Tom McPhail. He said: "It may no longer make sense for some investors to retire in the way they had planned. They may have to face up to the need to work a year or two longer."

Stock market volatility hits different kinds of savers in different ways depending on whether they have a final salary scheme, money purchase arrangements or personal pension savings. It is understandable that investors, who have already received statements showing their pension was worth less than a year ago, should be worried and wonder what their best course of action is. We answer your questions.

Should I just sell and get out?

Fidelity Fund manager Sam Morse says rushing out of equities is like closing the stable door after the horse has bolted. He points out that drip feeding money into the market at times like these can yield dividends in the long run.

Furthermore, Fidelity argues that over the past 15 years, investors made major gains on relatively few trading days, and missing out on the best 40 share price surges could have a major impact on overall returns. Missing out on the best 10 days after investing 1,000 in August 1993 would have cut your return from 3,054 to 2,011.56 . Miss the best 40 days and the stake would today be worth just 828.53.

Is my final salary pension safe?

According to Aon, company final salary schemes have seen 18bn wiped off their value in the past week, but senior consultant Marcus Hurd said in theory members have little to worry about as the employer is carrying the investment risk. He said: "Pension planning is a 30, 40 or 50-year investment so no one should get too worked up about what happens in one week in September."

However, reeling markets hit employers too, and many will look again at the cost of these pensions. We can expect more scheme closures and deteriorating terms for those whose schemes remain open.

What if my company goes bust?

If you are in a money purchase arrangement then your funds are ring-fenced. However, if you are have final salary arrangement and the scheme is in deficit when the company collapses, you will have to appeal for compensation to the Pension Protection Fund (PPF).

However, protection is capped. The PPF pays out a maximum of around 27,000 at 65, but compensation falls with age. So if you are 50 when you employer goes under, the most you get is around 21,000, at 55 23,000 and at 60 25,000.

This is a lesson already learnt the hard way by more than 4,000 employees at Lehman Brothers, who have been told their fund is in deficit. 

For this reason, if you have grave concerns about your employer's likelihood of survival, and are hoping for generous pension arrangements, you should seek advice.

David Cule, a senior actuary at Punter Southall, said: "If you have serious concerns about your company's future then you could consider asking for a transfer value and taking your money out. But this should only be done with extreme care and with advice, to make sure you don't end up selling your pension cheaply and forgoing benefits."

He added that changes to the transfer rules which come in next month give much more power to scheme trustees over the size of transfer values. "You may find some schemes use this transitional period to block any transfers over the next six months," Cule warned.

Alternatively you could take a transfer value in respect of part of your pension, and leave the rest, which would be covered by the PPF in the scheme.

I have a lifestyle company pension. Will its value be impacted?

Almost certainly. Employees with money purchase pensions, also known as defined contribution, are directly impacted by reeling markets because they shoulder all the investment risk alone, though there are different implications depending on your age.

The crucial advice is to make sure you have the right investment mix for your age. As equities are supposed to produce long-term growth, then those in the 20s and 30s can afford to ride out the storm.

McPhail said: "Younger investors will look back on these times and see what great investing opportunities they provided."

Many employees are invested in their company's default fund, which aims to gradually move people over to safer investments at key ages. However now may not be the right time to make those switches.

This usually begins to happen 15 years before retirement when the computer sells equities and buys fixed interest funds and gilts.

Mercer Principal Roger Breeden said: "If you are about to begin selling equities then you may wish to switch this service off in the hope there will be better selling opportunities soon."

What can I do about the falling value of my personal pension?

Some personal pension savings will have taken a hammering. 

Cule said: "Recent volatility will have left many investors worried, but the key is always to have a diversified portfolio. It is important that if you are taking risks you understand the risks you are taking, but also that you look at all your assets in the round." McPhail adds that managed balanced funds, where much pension cash is invested are only down 8.5% on the year.

He said: "In the circumstances that's not too bad. Unfortunately it may mean that some people will have to postpone retirement and work longer. The crucial thing is to know what is happening to your pension, and take whatever remedial action is necessary."

Breeden says: "You must be comfortable with the risks you are taking. For some, the current rout will offer buying opportunities. Others will prefer rebalance their risk profile by putting new contributions into a cash fund."

What if this turns out to be a 1920s-style crash? 

If you believe we are heading for Armageddon, then McPhail suggests you sell everything and switch into gold.

However, he adds: "This is exactly how capitalism is supposed to work. We lance the boil, it is painful and then we move on."

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