‘Don’t rush!’ How to manage pensions amid soaring interest rates | Personal Finance | Finance

Troubled Brits may be tempted to dive into their pensions to make ends meet amid the cost of living crisis, or consider reallocating their investments to take advantage of high interest rates. Express.co.uk spoke to three financial experts to get their thoughts on how Brits might organize their retirement and investing.

Boring Money CEO Holly Mackay said high interest rates are of most concern to people who are earning income from their retirement today or are about to retire.

She said: “Many pension funds hold a lot of bonds, particularly for those nearing retirement, and some of the largest global bond funds are down about five to 10 percent this year.

“However, these declines have already happened and so there is no point in reacting now – in fact, institutional investors are starting to buy again.

“I think the most sensible thing we can do is to be really clear about our timeline. The markets have had a terrible year – if you don’t need to sell off now then don’t rush just because the headlines are bad.

“Why sell at dire prices unless you have to? We can leave our pensions invested — there’s no rule that says we have to cash them in or take our entire 25 percent tax-free lump sum in one go.”

She suggested investing some money in annuities to diversify a person’s investments.

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Ms Mackay said: “The other thing to consider is pensions – these are back in town after a few years in the doldrums.

“Again, it’s not an all-or-nothing approach. You can use some of your retirement savings to buy a pension.

“And leave the rest invested. There’s no need to be dramatic — nor is it always the best approach to take one approach to exclude another.”

Chris Gill, senior investment adviser at Cartwright, told Express.co.uk that the impact of high interest rates depends on the type of pension pot.

He said: “For defined benefit schemes there should be no impact on members’ benefits, but higher interest rates on assets will often reduce the cost for employers of funding benefits and also reduce the size of funding deficits – that’s good news nonetheless, making the headlines .

“With defined contribution plans, rising interest rates can affect the value of stocks in the short run (and cause larger falls), and bonds tend to underperform.


“Traditional 60/40 stock/bond strategies will be less effective. This may hit those closest to retirement the hardest, but high interest rates also mean pension rates will be much better than before, so retired members might want to take a closer look than they have in the recent past.”

He said people should plan ahead and think about when they’re likely to be drawing on their pension pots and whether they’re going to buy a pension.

This allows an individual to switch to suitable assets over a period of time before the time they need the funds.

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For example, those buying annuities should consider investing in curves, while those relying on drawdown annuities may prefer to keep a broad diversification of investments.

He explained: “For those with a longer time horizon, a well-diversified portfolio of investments remains the key to longer-term growth.

“Above all, avoid knee-jerk reactions – think long-term. Don’t try to call or time markets. They usually bite back.”

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The pension expert also said that high interest rates usually go hand in hand with high inflation, undermining the value of the pension pot.

He spoke about some of the investment opportunities to fight inflation: “High interest rates usually come with high inflation, which erodes the value of members’ pots.

“This would tend to alert members to investments that might offer some protection against inflation – e.g. E.g. stocks, real estate, maybe private equity.

“Index-linked gilts are offering a positive return (1% to 1.5% per year after inflation) for the first time in ten years. If the time horizon is long, stocks are still the best choice for growth.”

Rowan Harding, financial planner at ethical finance firm Path Financial, said those with a DC pension will be hit hardest by high interest rates.

He said: “Economic markets will be directly affected by the rise in interest rates and this will affect the value of this pension plan.

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“Some people will be more affected than others because it depends on how your pension has been invested. Talk to your financial advisor if you have one and want to learn more.”

He continued: “It might be tempting to sell falling assets or switch to another retirement plan when you see your balance faltering rather than waiting for the turmoil to take hold. “But be patient. Knee-jerk reactions to market ups and downs are not useful and could leave you worse off. So keep calm and remember the mantra “time-in, not timing”.

As a good strategy for the future, he suggested diversifying and investing in more sustainable companies.

Mr Harding said: “Investing with those who are tackling the big issues threatening the world seems like common sense.

“I would recommend focusing longer-term investments on companies that offer long-term solutions for people and planet, such as renewable energy, healthcare and green technology.

“In the short term, as a consumer of financial products, you are helping by sending a clear message that you want to help address the current environmental and social issues we face by investing your money in companies that share your values.”

Britons should always be aware that investing puts capital at risk and its value can go up or down. Past performance is never an indicator of future results.

Therefore, the option is not suitable for everyone. Britons are urged to seek advice on their specific circumstances before making a decision.


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