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Credit crunch tentacles squeeze retirement
No-one knows how long the current economic crisis will last. But one group of people could suffer from it for the rest of their lives, writes Paul Lewis
Andrew rang my phone-in programme on Radio 4 to say he had put off retirement last summer but now wanted to stop work. But in that time the value of his pension fund had plummeted from 72,000 to 55,000. If he converted the fund into a pension now it would be a quarter less than it would have been six months ago. And that cut would last until he died.
He is not alone. Pension funds are invested mainly in shares and over the last year they have plummeted in value around the world. In London share prices fell by about a third in 2008. But that was one of the best performances. They fell by 34% in New York, 41% in Sydney, 42% in Tokyo, 43% in Paris, 48% in Hong Kong, 52% in Mumbai, and 65% in Shanghai. Nowhere was safe, wherever your fund was invested.
Andrew is self-employed and is now putting off retirement again. But if you are an employee you do not have that choice. Your boss can insist you go at 65 – and in the recession businesses are less likely than ever to let you stay on.
One solution to the problem of a sudden fall in share prices was identified in the 1990s. In the five years before you reach your retirement date the money in your pension fund is slowly moved out of shares and into something such as government bonds. It is called 'lifestyling' and it was seen as such a good idea it became compulsory for pension schemes that labelled themselves 'stakeholder'.
People about to retire whose money has been moved out of shares in the last five years will have benefited.
But many older schemes do not use lifestyling. And even those which do face another danger. If the five year period is just beginning your fund will be selling shares when they are cheap and buying government bonds when they are very expensive. So lifestyling will lock in the share price fall. And put the money into something else that may then fall in value.
There is no answer to these problems. It is just another example of how the tentacles of the credit crunch monster have reached every part of society. And squeezed.
* Written by Paul Lewis. Paul is the editor of Saga Magazine's Money News section. Paul's opinions are his own and for general information only. Always seek independent financial advice. This article was published on January 14, 2009.
