Pensioners face uncertainty during stock market turmoil

Older savers are having a nail-biting week as this week's stock market chaos gives their pension pots a roller-coaster ride.

Today, they are breathing a cautious sigh of relief, with the FTSE 100 is on track for its first weekly gain of the year, as oil prices rise.

But the past week's stock market slump has looked like costing pensioners dear, with more than £50 billion wiped off the cost of the shares in which their pension funds are invested.

Those most at risk are people nearing retirement, who face being thousands of pounds worse off, or those planning to take money out of their pension pot through drawdown or as a lump sum.

And today's improvement still leaves savers in a far more precarious position than they were a year ago, says Tom McPhail, head of retirement policy at Hargreaves Lansdown.

Since 27 April 2015, he says, the FTSE index has dropped by 20.1% and the average mixed asset pension fund has fallen by 9.4%. However, over the same period annuity rates have gone up by 1.6%.

"Those who are still some way from retirement should not panic; this is part and parcel of stock market investing and they will have time on their side to recover losses. For those close to retirement, or drawing their pension the recent drop could be more serious," he tells Pensions Age.

For example, a 65-year-old with a pension pot worth £50,000 at the end of April 2015 could have bought an annual annuity income of £2,739. Despite an increase in annuity rates, the same amount would only buy an annual income of £2,306 today.

The difference adds up to £8,660 over a typical 20-year retirement.

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Yesterday Work and Pensions Minister Ros Altmann acknowledged the problem but said that investors should keep their heads.

"It is important that people understand pensions are a long-term investment and markets will move up and down over time," she said.

"These are of course difficult times but having a diversified investment portfolio can help achieve good longer term returns. It is not possible to predict daily markets and they should be judged over the long term."

Indeed, for those whose retirement is some way off, the slump in the market could be good news, as their pension contributions will be going to buy stocks at a lower price than before.