Protect Your Pension From Falling Stock Markets

If you're about to take an income from your pension, how can you protect it from flagging stock market performance?

"The value of pension scheme assets has plummeted by nearly a third in the past 12 months."

That's according to Aon Consulting who report a staggering £157 billion has been wiped off the value of employees' defined contribution pensions over the last year. This is very bad -- although hardly surprising -- news given the current economic downturn and stock market turmoil.

Should you be concerned?

If you're paying into a defined contribution scheme, and your retirement date is coming close, eroding pension values could be a problem for you. After all, the final size of your pension pot will determine the amount of income you receive during your retirement. A sudden collapse in its value just as you take benefits could be a significant blow to your standard of living.  

Safeguarding your pension

So, what can you do to make the most of your pension pot in the face of deteriorating share prices?

Most of us will convert our pension fund into an income using an annuity. An annuity provides a guaranteed level of income for the rest of your life. But the problem is, when the value of your personal pension fund drops, the amount of annuity income you can buy with it will fall too.

But all is not lost. There are steps you can take to boost your income.

Defer taking your income

This doesn't necessarily mean you have to carry on working, particularly if there are other sources of income you can fall back on in retirement. But, by leaving your pension invested -- rather than buying an annuity now -- there's an opportunity for the value to recover once stock markets strengthen.

Of course, it's impossible to predict how long this might take, so there's a risk waiting a year or two might not have the desired effect. Worse still, if share prices decline for a prolonged period, your pension value could fall even further.

But there's a second benefit. The fact is you'll get more income from your annuity if you're older. This is because the annuity is likely to payout benefits for a shorter period overall. So, in return for waiting, you'll be rewarded with a higher income.

If you put off taking your annuity for say, five years, you could enjoy an income which is around 15% greater at 70 than the amount you would have received at 65, all other things being equal.

Unsecured Pension/Income drawdown

If you have a relatively large pension fund -- I'm talking £100,000 plus -- you could take an unsecured pension (USP) - or what used to be known as income drawdown. USP allows you to take an income while leaving the rest of your pension fund invested, giving you the opportunity to take advantage of future stock market growth.

That said, USP isn't for the faint-hearted. It can be a pretty risky option if the value of your pension continues to drop. If that happens for a sustained period, your pension fund might not be able to support the level of income you want to take. You must speak to a specialist pension adviser before you set up an USP plan.

But what if you have to buy your annuity now?

If you have no choice but to buy an annuity now, don't despair. While depressed pension values may mean your fund isn't as happy as it once was, you can still squeeze a higher income out of your annuity. Here's how:

1. Use the open market option (OMO)

The OMO simply means shopping around for the best annuity you can find. Annuity rates are more generous at some insurers than others. Don't just settle for the annuity offered by your pension provider because you could find a more competitive rate elsewhere. The difference between the best and worst rates can be huge, so it pays to compare the market.

2. Retire in stages

If, like most people, you have more than one pension scheme, you could buy an annuity using one scheme and leave the rest in place until markets improve. Of course, this only works if one pension fund by itself can provide you with all the income you need now.

3. Think enhanced annuities

This is a special type of annuity which provides more income if you have a lower than average life expectancy. If, for example, you're a smoker or you're overweight, you could qualify for better annuity rates.

4. Impaired life annuities

Impaired life annuities are similar to enhanced annuities, except that they offer a significantly higher income if you're in very poor health. For example, if you suffer from a severe medical condition such as certain types of cancer, liver or kidney disease, or you have had a stroke or heart attack, you may be eligible. An impaired life annuity can make a really big difference to your retirement income.

I really do sympathise with you if you feel forced into taking benefits from your pension just as its value is collapsing. Sadly, making the most of your annuity -- while good financial sense -- is unlikely to counter the effects of a declining stock market, but it will help to limit the damage.

More: Boost Your Pension Buy £960 A Year | How To Buy The Right Annuity