While short-term periods of stock market volatility are to be expected, 2022 has been particularly tough for equity investment.
Global economies struggling to recover from the coronavirus pandemic have faced supply chain issues, labour shortages, soaring inflation and the war in Ukraine.
On top of that, former chancellor Kwasi Kwarteng launched a mini-Budget of unfunded tax cuts onto an unsuspecting market. Overseas investors lost faith in the UK economy and the value of the pound against the dollar plummeted.
As the Bank of England (BoE) stepped in to steady the market, you might have seen worrying headlines about pension funds potentially going bust.
It’s understandable to be concerned but important not to panic.
Keep reading for your look at what recent changes to the bond market mean for your pension. You’ll also find the latest on the mini-Budget announcements to survive Jeremy Hunt’s extensive reversals, including those made to Stamp Duty.
What are bonds and why do they matter to your retirement?
A bond is essentially a loan you make to a business or organisation. When the borrower is the UK government, the bond is known as a “gilt”.
The business or government uses your money to support its spending, and in turn, pays you a fixed rate of interest until maturity. The rate of return the bond generates is known as the “yield”.
Gilt yields have been low since the 2008 global financial crisis, partly due to the BoE buying bonds to support the economy. Yields have been on the rise recently thanks to soaring inflation pushing up interest rates.
The government’s recent mini-Budget, however, brought about a seismic drop in the price of gilts. In turn, this caused potential liquidity issues for Liability Driven Investment funds, largely owned by defined benefit (DB), or “final salary” pension schemes.
In an attempt to shore up the economy and restore investor confidence, the Bank of England looked to buy up to £65 billion of UK government bonds.
Your “final salary” or defined benefit (DB) pension will likely still pay out in full
Around half of your DB workplace pension assets are likely held in bonds.
While bonds are normally seen as low-risk, sharp rises in bond yields can leave schemes vulnerable. It is this vulnerability that led to headlines about funds “going bust”.
The BoE’s intervention calmed markets. In turn, they also reacted well to Jeremy Hunt’s reversals and the news of Rishi Sunak’s Conservative leadership race success.
It is important to remember that DB schemes are widely considered the gold standard in pensions, due to the income they offer, alongside additional benefits like spouses’ pensions and built-in inflation-proofing.
The BoE’s intervention means that as long as the employer sponsoring your pension scheme remains solvent, there is little risk of your pension not being paid in full, and little need to panic.
An annuity might be a more favourable option for your defined contribution (DC) pension
Most UK workers now save into a DC scheme. These typically invest in a mix of equities, bonds, gilts, and other assets.
Stock markets have largely fallen this year and Kwarteng’s mini-Budget badly affected the bond market, further adding to the disruption.
If your retirement is still some time away, you can afford to be patient. If your retirement is imminent, though, you’ll want to give extra thought to how and when you access your funds.
As interest rates rise to combat inflation, annuity rates are rising too. They are up between 40% and 50% in 2022 so far.
An annuity’s fixed, secure, and stable income might be appealing in the current climate.
Remember too that an annuity can be used as part of a mixed retirement approach, alongside the flexible options introduced through Pension Freedoms legislation.
Stamp Duty has been cut… for now
Kwasi Kwarteng’s mini-Budget announcements affected bond and gilt markets, as well as the value of the pound, and have led to rises in mortgage rates, a decrease in the mortgage products on offer, and forecasts of dropping house prices.
While Jeremy Hunt later rolled back on many of Kwasi Kwarteng’s mini-Budget announcements, the latter’s cut in Stamp Duty stayed in place and remains the one ray of hope for homebuyers, for now.
The cut means that no Stamp Duty will apply to the first £250,000 of a property purchase, saving a second-time buyer £2,500 when purchasing a house valued at £250,000.
The threshold at which first-time buyers start paying the duty has risen to £425,000. The value on which relief can be claimed has also risen from £500,000 to £625,000.
As Rishi Sunak re-enters Downing Street – this time as prime minister – it remains to be seen in the cut will remain in place.
Get in touch
With global markets and the UK economy unstable at the moment, worrying about your finances is only natural. At Fingerprint, our experts are on hand to ease your concerns so whatever questions you may have, speak to us now. Get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
The value of investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
