Six things to know about volatile markets and your pension

Global stock markets have witnessed wild swings as Trump’s trade wars rattle investors. Here’s how to navigate your retirement portfolio through the storm.

10th April 2025 09:29

Craig Rickman from interactive investor

“Whatever you do, don’t think of a pink elephant.” You may be familiar with this phrase, which is an example of ironic process theory. It highlights the counterintuitive idea that when you try not to focus on something, you inevitably do. The thought is strengthened, not weakened. You’re now thinking of a pink elephant.

So, as Trump’s trade wars trigger wild stock market swings, the message is “whatever you do, don’t panic with your retirement savings”. As ironic process theory suggests, this is easier said than done.

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For most, your pension is your ticket to future financial security. An onset of the jitters is a perfectly natural response. The more advice you read urging you not to worry, the more chance you will.

Global stock markets had already experienced notable turbulence this year before Donald Trump unleashed his most recent raft of trade tariffs. The resulting stand-off between the world’s two leading economic powerhouses, the US and China, has stoked fears of a global recession. Investors have been running for cover.

It’s been a wild week for markets, to put things mildly. On Wednesday morning, the S&P 500 had fallen almost 11% in the past week, but recovered these losses in a day after Trump’s 90-day tariff pause sent stocks rocketing – the market registered one of its biggest days since the Second World War.

In other parts of the globe, and in a similar vein, the Nikkei 225 – Japan’s main market – and the FTSE 100 both plunged earlier this week but bounced back on Thursday.

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We appreciate that stock markets move down as well as up; to gain rich rewards it can’t be all one-way-traffic. But such erratic behaviour can induce a sense of unease, an urgent need to take action to shift our retirement savings to steadier ground.

But before you make any big decisions, here are some important things to know about market volatility and your pension savings.

Focus on things within your control

Holding your nerve in times of distress isn’t easy. We don’t know if recent events will prove a transient tremor or mark the start of something even more severe.

Either way, it’s best to turn down the noise and focus on simple things that you can control, like making sure your retirement portfolio is diversified, meaning your money is spread across various asset classes, geographies and sectors. The idea here is that if some areas of your portfolio are struggling, others will be there to support them.

Lots of pensions will be affected, but not all

Most pensions these days are what’s called defined contribution (DC) arrangements, which is where you build a pot of money for retirement, the size of which is determined by how much you pay in and how your investments perform.

As most of us invest a significant amount of our DC pensions in the stock market, the recent wobbles will affect us. This is by no means a prompt to hit the panic button and, as I explain further down, not everyone will be impacted to the same degree.

However, if you have a defined benefit (DB) pension – whether you’re drawing from it or not – this will be protected from market falls. DB schemes are a type of workplace pension that pay a guaranteed and inflation-linked income for life based on your salary and number of years’ service.

The same applies to any lifetime annuities you’ve bought – the terms you chose at the outset are fixed for life and aren’t influenced by stock market behaviour.

Market falls affect some investors more than others

You should be mindful that the pain of market slumps isn’t felt equally across savers.

First, those with smaller proportions in shares and more in safer assets such as government bonds and cash will have experienced softer falls. The drawback with this approach is that you’ll benefit less when markets rise – like we’ve seen in the past 24 hours.

Your age and whether you’re saving for retirement or drawing down from your portfolio are further factors.

If you’re decades from retirement, the recent volatility should be far less of a worry. In fact, drip-feeding money into your pension monthly could actually work in your favour.

That’s because when stock prices fall, your regular investment will buy more shares. When prices recover - which history tells us does happen, we just don’t know when - you’ll own a greater number of shares to benefit from the rebound. This is a concept known as pound cost averaging and is a handy tactic to help soften the impact during volatile investment periods.

The message for younger savers is to continue paying into your pension when stocks fall, and don’t be tempted to reduce risk, otherwise you might forfeit valuable future growth.

Revisit your plan if you’re approaching retirement

While market turbulence can rattle any investor, those approaching retirement may need to keep their guard highest.

That’s because sharp losses shortly before the point you plan to draw retirement income could jam a spanner into the gears of your well-laid retirement plans.

A big consideration is whether to reduce investment risk as your golden years draw closer. The process of de-risking involves gradually moving out of shares and into bonds and cash – usually over the course of three to seven years.

Whether this approach is right for you will depend on several factors, which include: your personal risk appetite; whether you plan to stay invested in retirement or buy a guaranteed income; your access to other income streams such as property rentals or DB pensions; and your flexibility regarding retirement dates.

There is no uniform approach here. For some, heavy de-risking will be preferred, especially if you’re set on buying an annuity with the bulk of your savings and prefer a hard-stop retirement. The smaller your pot at the point of purchasing a guaranteed income, the less income you’ll receive.

Conversely, if you have a sizeable retirement pot, plan to draw income flexibly, and/or have the luxury of sufficient other income or assets to rely on in old age, you might decide that little-to-no derisking is necessary.

These are the two extremes. Most of us will be somewhere in between. It essentially hinges on whether market falls at the point of retirement will derail your plans.

Whatever your situation, deciding carefully how to invest in the years before retirement is critical and can help to avoid any nasty shocks down the line.

In drawdown? Consider which assets you sell to generate income

The threats of falling share prices are also acute to those who have kept their pension savings invested in retirement and are drawing down from them.

There are various ways to achieve a regular income from your retirement investment portfolio. These include selling shares at a chosen percentage of your total holdings every year, or taking the natural yield and leaving the capital untouched.

The problem with the former is that encashing shares when markets drop can cause lasting damage to how long your portfolio lasts, something known as pound cost ravaging.

One way to mitigate this risk is to have a healthy cash holding to dip into to enable you to temporarily pause selling shares, at least until things recover.

Most experts recommend an amount equal to two to three years of retirement outgoings, but cautious investors may prefer to hold more – it’s whatever works for you.

Holding too much cash is something normally best avoided. That’s because over longer periods cash savings tend to underperform shares and bonds, which can drag on investment performance – something that’s crucial to give your drawdown pot the best chance of lasting a lifetime.

One final point here: if you do deplete your cash reserves, don’t forget to top them up again to protect your portfolio when the next slump arrives.

Knee-jerk moves are rarely the best approach

Provided you’re comfortable with the degree of investing risk you’re taking, seeing your portfolio fall in value shouldn’t trigger any panic.

One urge might be to swap stocks and shares in favour of cash and cash-like assets such as money market funds. Now, if stocks suffer further falls and you re-enter the market at the right time, you could be quids in. Unfortunately, in the absence of a crystal ball, accurately predicting market movements in the coming weeks or months is impossible, and you risk sitting in cash while markets rise.

Often the best approach is to keep faith in your investment strategy, as the storms will eventually pass. There’s nothing wrong with being concerned about how falling markets will affect your retirement savings, just make sure to take a step back and consider the bigger picture.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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