How do I protect my pension in falling markets? Steve Webb replies

I have a Self-Invested Personal Pension worth £480,000. The majority of this was from a financial settlement.

I am 51 now and would like to retire at 60. I am still paying into a work place pension (around 10 per cent of my salary).

I’m desperate not to lose my pension pot and am worried about the dip in the market just now.

I realise I need to be looking long term, but at the moment I just see thousands slipping away.

Will I have enough for retirement? Is there anything I can do to protect my pension pot?

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Steve Webb replies: With the current turmoil in the financial markets I can entirely understand your concern about what the future may hold.

However, whilst none of us can say with certainty whether the markets have now ‘reached the bottom’ and will start to recover or have further to fall, the current crisis is a reminder of some timeless truths about how best to build a decent pension pot in the longer term.

To start on a positive note, it is really encouraging to see that you are putting a meaningful amount of money into your workplace pension.

If you can keep doing this for another decade up to your planned retirement, this will make a real contribution.

The first advantage of saving in this way is that your employer will be paying in as well. This helps to build up your pot more quickly.

The second advantage is that you get tax relief on your pension contributions, so there is in effect a contribution from the Government.

In terms of your investments, you are right to say that you need to focus on the long term.

When markets plunge in a single day it is easy to forget that those who have invested in shares have generally enjoyed a decade of pretty sustained growth.

Market falls will always happen from time to time, although it is fair to say that recent falls have been some of the most dramatic that we have seen.

An important principle in investing is not to put all your eggs in one basket – or to ‘diversify’ your investments.

This can involve investing in a range of markets (not just the UK stock market) but also a range of ‘asset classes’ – this could include corporate bonds, government bonds, commercial property, commodities and so on.

The attraction of investing across a range of assets is that it is very rare for them all to move the same way at the same time.

Investing across a range of assets and deciding the right mix is not straightforward but there are relatively low cost ‘multi-asset’ funds available where this is done for you.

Another important principle is to invest according to your attitude to risk and your capacity to cope with losses.

As you get older, you are starting to want greater certainty and that may mean gradually moving your investments into lower risk assets.

This process is known as ‘lifestyling’ and it is possible that your workplace pension provider is already doing this for you on your workplace pension.

The only thing to bear in mind about moving into lower risk investments is that, all being well, you could be retired for 25-30 years if you retire at 60.

This is still a long time horizon and if you move too early to low risk assets you are likely to face much lower returns over that period.

Although the value of your pension pot will probably have gone down even further since you sent in your question, you can take comfort from the fact that you have made a solid start to saving for a pension and are already doing many of the right things to keep building up further pension saving for your retirement.