Defined contribution pension pots near their highest levels despite troubled markets

24th May 2016

The value of the typical DC pension pot is just 2% off its all-time high as savers benefit from rebounding markets, according to the inaugural “Why Markets Matter” report from Close Brothers Asset Management.

The research, which analyses the impact of financial markets on pension pot savings, demonstrates that the average person’s DC pot stands at £15,579, up from £15,501 at the end of 2015 – albeit below the record high reached from financial markets’ recent peak in the first quarter of 2015 (£16,062). Markets have an even greater impact on accumulation over the long-term.

Mediansavings

Since 2002, market movements have boosted average DC equities. At the end of April, typical 25-34 year olds had DC pension savings of £5,360. Market movements mean this was worth £2,001 in 2002, excluding the impact of any additional contributions, an increase of 168%. Given younger savers’ long-term investment horizon, it matters less that during the financial crisis a more equities-focused approach meant their pensions almost halved in value to £2,392. The subsequent rebound in the stock market means they have more than made up these losses. By the end of April, this age group had seen its savings climb a further 2% in 2016, shrugging off severe market turmoil earlier in the year.

For someone on the brink of retirement, less risk in their portfolio means it withstood the financial crisis much better. The typical DC pot of a 65 year old who was still saving stood at £13,341 at the end of 2002, and lost just one third of its value in the financial crisis – much less than younger generations with more risk in their portfolios.  In the upswing that followed, this older age group benefited particularly from ultra-low interest rates and quantitative easing, which caused bond prices to rise far more than would be expected in normal economic times.  A 65 year old pension savers each had a pot of £29,417 in April, representing growth of 120% since 2002. This however, is far less than 25-34 year olds’ pension pots grew over the same period, which is to be expected from a lower risk portfolio over the longer term.

A lower risk approach comes into its own in volatile times as was January when this age group saw a fall of just 1% in the value of their portfolios, compared to a 5% decrease among 25-34 year olds. However, this also means that since the end of January’s volatility, their savings have increased by 3%, compared to  the 7% of 25-34 year olds’ savings.

Taking on appropriate investment risk can make a significant difference to current finances, as well as meeting future goals. To achieve a retirement income of £16,000 in today’s prices, a 25 year old individual earning £25,000 a year would need to accumulate savings of roughly £500,000 at 65. If they saved in cash, earning 1% per annum, they would have to put aside £6,900 per year, representing more than a quarter of their gross annual income. But if they opted for the higher risk approach, appropriate to a typical saver of their age, they would only have to set aside around £1,500 per year.  By adopting a higher risk approach, accepting that in some years their savings might fall in value, they should need to save  far less of their income today.

Andy Cumming, head of advice at Close Brothers Asset Management says: “There is no doubt that markets matter to pension savers. The market rebound since January alone would provide an entire year of extra income in retirement for savers. The long term benefits are even more tangible – it’s time in the market, rather than timing the market, that counts.

“Pension savings are clearly worryingly low across all age groups as generous DB schemes fall by the wayside. People cannot escape the need to save more, but it’s all the more important that they understand how financial markets can do a lot of the heavy lifting. If savers opted to take no risk, or simply stuffed cash under the mattress, they will never hit retirement goals, or would have to set aside increasingly unaffordable sums while working. Simply setting aside money isn’t enough. You have to set it aside in the right place, unlocking the potential for long-term growth.”

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