Those saving money in pension schemes in Britain were given more bad news yesterday. After the FTSE 100 suffered an enormous drop due to more bad news from the eurozone, many investors moved away from the companies it represents and into UK gilts instead.
UK gilts are seen as a far safer option for investing. They don’t carry the same potential rewards as trading in true stocks and shares, but they don’t have nearly the same level of risk either. Whenever the market begins dropping substantially, there is a large move towards these gilts. Unfortunately, the more people who invest in them the less everybody gets for their investment, and the gilts are one of the main ways pension-schemes create income.
With so many jumping on the gilt bandwagon at once, pension funds have seen the amount they expect to receive drop rapidly. This means they have less money to pay out to those contributing to their pension pot and thus everybody who has been saving with them gets a lower return.
It’s a double-whammy too, as lots of pension funds will put money on stocks and shares as well, splitting their resources between high-risk, high-yield and low-risk, low-yield: “The FTSE 100 plummeting by 117.9 points is disastrous for pension pots as the vast majority of all pensions and savings are linked, at least in part, to shares,” said Nigel Green of the deVere Group, the world’s largest firm of independent financial advisors. When gilts pay out less and the FTSE drops, pension funds lose their two major streams of income.
Whilst this could change in the future as the economy recovers, for those about to enter retirement it makes for difficult reading. Green warned that changes in the markets like these affect those about to enter retirement most: “those on the cusp of retirement are destined to have a permanently lower level of retirement income.”