‘My pension has dropped £20,000 since the Iran war began’

Since war broke out in Iran the value of James Owen’s pension has dropped by £20,000.

Owen, 65, retired from teaching last summer and immediately invested the lump sum from his defined benefit pension scheme into a self-invested personal pension (Sipp) with the platform AJ Bell. Since the conflict began a month ago, sending shock waves across the global economy, his pension has taken a 15 per cent hit.

Iran has closed the Strait of Hormuz, cutting off a key shipping lane for oil and gas and causing havoc across international energy and stock markets. Less than 5 per cent of investment funds have made a positive return since the US and Israel launched the first airstrikes on Iran on February 28, according to the data firm FE fundinfo.

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Investment performance is crucial for the roughly 700,000 people who retire each year, especially for the increasing number who have a defined contribution pension (where how much you have to spend is based on what you pay in and investment growth). Those with a defined benefit pension like Owen get paid a set income for life. Both types of scheme let you withdraw a 25 per cent lump sum tax-free.

When war breaks out investors often panic and sell off shares, hitting the value of pension funds that hold these stocks. For most savers, this means the value of their pot is likely to be less than what it was a month ago.

But Owen, who avoids drawing down on his Sipp, is not worried. “It will come back. Even if it doesn’t recover in the next year, it will over the next few,” he said.

The key to Owen’s calm approach is a retirement strategy that doesn’t plan to use the funds he has invested in the stock market for at least another ten years, if not longer. He used another private pension to buy an inflation-linked annuity (an insurance product that pays an income for life) and uses the money to cover his living expenses. Owen also does part-time maths tutoring to top up his income.

He said: “The money will eventually be used for whatever I need, maybe to pay for being looked after when I am 20 or 25 years older.”

While the war itself has not panicked Owen, President Donald Trump’s rhetoric has led him to change his investment approach. He “prunes” his portfolio annually, and most recently shifted his Sipp portfolio into more defence stocks, such as BAE Systems. He sold stocks he thought were underperforming, including the oil giant BP, the sportswear makers Nike and Adidas, the tech firm Baidu and the advertising company WPP.

Giving your investments time in the market and keeping a level head are two of the biggest defences against long-term investment losses. Clare Reilly from the savings consolidation firm PensionBee said: “It’s important not to react to short-term fluctuations.

“Pensions are long-term investments, and markets have historically recovered over time. For most savers, the focus should be on staying invested and continuing contributions.”

That said, how you respond to the continuing conflict in the Middle East will depend on what stage of life you are at. It’s also important to understand exactly how the war is affecting your finances, so you can best plan around it.

How the price of oil affects your pension

Because the Strait of Hormuz, through which about 20 per cent of the world’s oil supply is transported, has been mostly closed since the conflict began, millions of barrels of oil have been removed from the market.

While the UK doesn’t import much oil or natural gas from the Gulf, the reduced supply has triggered a bidding war that has driven up the price globally.

Since energy is used by everybody and it goes into making and transporting every product, when it gets more expensive, so does everything else. These costs get passed on to consumers, pushing up inflation and interest rates as a result.

Craig Rickman from the investment platform Interactive Investor said: “Bond prices and stocks across the globe have fallen, and these are the two main asset classes held within default pension funds.”

Rickman said that while it could be tempting to run for cover and shift your pot into something safer until the storms pass, this can prove costly if you miss the moment markets rebound. 

What to do if you’re decades from retirement

Anyone with more than ten years until they retire can probably afford to relax, said Ed Monk from the pension firm Fidelity International.

He said: “If you still have many years of pension contributions ahead of you, share price falls now can actually work in your favour because they allow you to buy assets at lower values. This can boost your returns in the long run.”

Nearing retirement

For those approaching the end of their working life, steep losses will have less time to recover if you plan on drawing an income from your pension as soon as you retire.

But many in this position should find themselves partly protected from stock market volatility thanks to de-risking, also known as lifestyling.

Most default pension funds are set up so that as savers approach their expected retirement date they are gradually moved away from riskier assets such as equities into bonds or cash. These are considered “safe haven” assets, although they’re not entirely without risk — the bond market has also suffered as a result of the volatility caused by the conflict in the Middle East.

There is a balance to strike with de-risking: doing so too early means your pot can miss out on vital growth in the market, but leaving it too late means your pot can lose value just as you need the money.

Steve Webb, a former pensions minister who now works for the consultancy LCP, said: “Savers face a real dilemma — taking risk off the table early means you are more insulated when markets fall as they have done in recent weeks.

“But taking risk off the table early probably also means lower returns over the longer run. In a world where people are probably going to stay invested into retirement, being too cautious too soon could mean not working your savings hard enough and building up a smaller pot overall.”

As you approach retirement, you should check your investment approach and make sure it still matches your plans. 

You may run into problems if these two are not aligned — for example, if you are invested 100 per cent in equities but plan to turn your pension into a guaranteed income by buying an annuity soon, then you run the risk of your pension pot losing value dramatically. This would leave you less to spend on an annuity and a smaller income as result.

If you are hoping to draw down flexibly on your pot instead, leaving the rest invested having more in equities may be more appropriate, as you have more time for your pot to recover from any shocks. You could sit tight and hope the value recovers, or tweak your retirement plans. This could mean you accept you may need to wait a bit longer to access your pension, or withdraw a lower amount.

Already retired

You should be cautious about taking money out of your pension while markets are down if you’re retired. Doing so will lock in losses. Instead, you might want to dip into rainy day savings if you have them to tide you over until markets recover — which can happen surprisingly quickly.

Trump’s tariff war early last year shocked global stock markets, with the S&P 500 index of big American companies dropping 12 per cent in less than a week at the start of April, sparking fear among investors. But by May 2 the index had bounced back.

If you have no cash savings to fall back on, temporarily reducing the amount of income you take from your pension may lessen the long-term impact. Withdrawing a fixed amount will erode your savings faster, but if you can live off any remaining growth or dividend payments until the markets recover, the capital will still be there.

Anyone who has already bought an annuity will not suffer a fall in income from the market turmoil, but they may feel the squeeze nonetheless. Tom Selby from AJ Bell said: “For anyone who has used some or all of their pension to buy a flat annuity [where the annual income doesn’t rise], the big worry will be a prolonged period of higher inflation. If prices rise significantly, that will eat into their spending power and leave them worse off as a result.”

And those who don’t need to worry

Anyone lucky enough to have a defined benefit pension won’t be directly affected by stock market falls, and should be sheltered from rising prices as most schemes are inflation-linked. The value of the state pension should also be protected, since the triple lock means it rises in line with the highest of inflation, wage growth and 2.5 per cent.

However, Selby warned that state pension spending could be re-evaluated. “If borrowing costs soared the UK could be forced to reduce spending in some areas, as other costs such as defence are pushed up,” he said.