Why Nosediving Markets Are Good For Your Pension Plans

Article Category: Finance

Falling markets, depreciating pension funds: it's enough to make you start stashing your money under your mattress. But the apparently bleak news might not be as bad you think.

If you've been watching the news recently you're probably all too aware that the global money markets have taken a real battering. Aside from errant bankers and their dodgy deals, pension funds around the world are facing a serious shortfall. Many pension funds have made little to no progress in the 12 months to March 2012.

If you're one of the growing number of investors planning to stop paying money into their retirement pots you might want to stop for a moment and read this rather counter intuitive viewpoint.

Even though pensions have suffered (the average fund has lost about 5 percent of its value over the last year) they're still growing. As an example, a regular saver depositing £200 per month over the last 12 months will have a fund value of about £2,372. Although this represents a loss of £28 it's still less risky than many other investment vehicles available to savers.

So how, exactly, does this make for good reading? Basically, it all comes what is known as "pound cost averaging". By investing a set sum at regular intervals your money buys more shares when prices are low and fewer shares when prices are high.

To put this in simpler terms; the current market woes around mean that the cost of acquiring shares is dropping. The falling price of shares means that your money can be used to buy a greater number of shares in any given company. By the time you reach the day of your retirement market value should have corrected which means you'll have a bigger pension fund from which to draw on.

Here's an example that should help to clear up any doubts. In 2008, the FTSE blue chip index fell below 3,500. Today, that figure has risen to well over 5,500. Anyone that has regularly invested in the FTSE since the 2008 lows will now be sat on some no so insignificant gains in retirement funds.

For anyone nearing retirement and considering a move abroad the potential benefits are twofold. A rise in the value of your pension fund coupled with falling house prices and relatively stable levels of inflation means your money will go further. However, the key is to weigh up the overall costs associated with moving and living in a foreign country.

Before I wrap it would be disingenuous of me not to mention inflation. Whilst markets will inevitably fall and rise, resulting in gains for long term investors, inflation still has a part to play in the final value of your pension fund. Fortunately, dividend income and pound cost averaging have reversed the more recent effects of rising inflation. But don't be lulled into a false sense of security.

More and more, the younger generation are putting off investing into a retirement fund. Living for now and worrying about tomorrow… tomorrow may seem like an appealing thought but you need to consider a couple of points:

On average, we will all work for about 40 years of our lives. Most of us expect to have about 20 years in retirement but, for some, this number could be far higher. Unless you receive a final salary pension your retirement income is going to be far lower than your current take home pay. If you think it's going to be hard surviving on pension that you've contributed to for 40 years how much harder do think it will get on a pension you've only paid into for 15 – 20 years?