Jeremy Gates looks at the nation’s money issues and reports on how to handle your savings following the recent plunge in the stock markets

MILLIONS of workers with private sector pension plans have lost four and even five-figure sums in the past few days, as stock markets around the world plunged and London shares, at one point, saw a decline of more than 20%.

The employee at Standard Life couldn’t have been kinder when I nervously asked for a valuation: I lost just more than £1,200 in five days, about 2% of my pot.

I should count myself lucky. Figures from the National Association of Pension Funds show more than £120bn was wiped off the value of Britain’s pensions in the last month, worth somewhere between 6% and 7% of the total pot.

This could be a devastating blow for some of the record number of workers due to retire in 2012, who may not see markets pick up before they stop work.

Needless to say, it would have been completely avoided if they had still been enjoying the luxury of final salary pensions, now rare in the private sector, when this sort of problem is a worry only for pension fund trustees.

Amazingly, though, many determined small savers apparently strode forth into the carnage, rather like the heroic horsemen of the Charge of the Light Brigade, says Alliance Trust Savings, which offers dealing services for clients building private pensions, ISA pots, or share portfolios.

Alliance customers hold an average of £68,000 in pensions, £36,000 in self-select ISAs and £14,000 in share dealing accounts.

At the height of the storm (Friday, August 5 and the following Monday), their “buy” orders boldly averaged around £4,000 each.

Steve Latto, Alliance Trust head of pensions, says: “Many customers are showing confidence in the long-term value of equities, despite current market volatility.”

At Barclays Stockbrokers, the largest online execution-only broker, holding 380,000 accounts, head of product, Paul Inkster, says: “While some investors wait for events to unfold, many others are actively seeking investment opportunities.

“Clients are also seeking out traditional safe havens, especially gold, which hit a new high this week above $1750 per ounce, but developed equities also continue to be a popular choice.”

However, if it becomes the norm for stock markets to swing by a massive 7% within a single day, as happened in London on Tuesday, and if the nightmare problems of the eurozone continue, steadfast savers will face challenging times.

Laith Khalaf, pensions analyst at financial advisor Hargreaves Lansdown, says: “Pension investors retiring 20 years hence are unlikely to rue this week’s stock market falls when they eventually draw their pension.

“Those close to retirement have greater cause for concern, though they may have been sheltered to some extent by de-risking their pension investments.

“Pensions investors should regularly assess pension investments to make sure they still suit personal circumstances and attitude to risk.”

One result of this current turmoil is that retirement income could vary widely, depending largely on the day you are lucky – or unlucky – enough to stop work.

This is because bond yields are nearly as erratic as equities – and they have a sharp effect on annuities, which decide the level of a pension and now pay 2% less income than they did in July.

Bob Bullivant, chief executive at Annuity Direct, says: “Given the severity of market falls, the best advice to workers is defer taking an annuity if they can afford to, perhaps using the cash (25%) portion of their pension fund to tide them over through the mayhem.

“One option might be to take a short-term annuity, with a guaranteed sum at the end, and then look again at the end of the term. It is worth taking advance from a specialist adviser.”

The events of this week have focused attention on “lifestyling” – the managing of a pension pot to significantly reduce risk in the final years before retirement.

In the five or 10 years ahead of retirement, the decision is taken to cut the level of equities in a personal pension pot and the money re-invested more safely into bonds, gilts and cash.

According to figures from Hargreaves Lansdown, a £100,000 pension pot would have delivered a pension for life of £6,440 a year if drawn a month ago. Wholly invested in FTSE 100 shares, the pot today would have shrunk to £86,200 – giving an annual income of only £5,430.

But somebody with a lifestyle pension held in secure assets such as bonds would have seen their fund rise to £104,160 – to produce £6,560 a year.

Khalaf adds: “There are obvious benefits and drawbacks to lifestyling.

“Usually, it means equities within a pension pot get sold at a pre-determined date, with no rationale or intelligence applied, and sometimes sales occur when share prices are at low levels.

“This may generate a significant shortfall, before money is switched to safe assets. That is why it is often better if investors make a decision themselves to move assets in their fund.

“The other problem with lifestyling is that retirement, for many workers, is a moving target. Approaching retirement, plans can change and then your money may be stuck in safe assets yielding lesser returns for several years.”

Another detail to be considered is whether the saver is likely to take a conventional annuity, which leaves much of a pension pot still invested in the market.

Of course, many people are steadily building up savings in managed funds outside pension pots.

For them, the breathtaking plunge in shares this week raises possibilities: suddenly, with share prices significantly lower, the monthly payment of £100 or £200 buys more units of investment.

According to the Association of Investment Companies (AIC), which represents investment trusts, a saver investing £50 per month through the last bear market of 2007-09 was safely in profit (nearly 10%) if they kept saving through the bounce in the market which eventually came in mid-2009.

Annabel Brodie-Smith, AIC communications director, says: “The recent market volatility is understandably concerning for investors.

“While none of us can be sure of the markets’ next move, it demonstrates the importance of taking a long-term view of your investments.

“Regular investing each month gives you a lower risk profile by helping to smooth out some of the highs and lows in the price of shares.

“However, over the longer term, lump sum investing has outperformed regular investing because investors’ money has been invested for longer.”

Savers in recent years have faced a real puzzle: as shares have become more volatile, the case for investing in equities has become stronger – mainly because the return on cash is so hopeless.

INFORMATION: Most popular investment trust is Scottish Mortgage IT; Alliance Trust Savings (01382 573 737 and www.alliancetrustsavings.co.uk); Barclays Stockbrokers (0845 601 7788 and www.stockbrokers.barclays.co.uk); Hargreaves Lansdown (0117 900 9000 and www.hl.co.uk); Association of Investment Companies (020 7282 5555 and www.theaic.co.uk)