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Choppy times ahead for holders of private pensions – perhaps time to seek shelter in the safe haven of property investment? By Peter Law, Bold Spirit

If anything were to serve as testament to the wisdom of investing in property, the on-going volatility experienced by the FTSE and other stock exchanges around the globe, and the negative impact that this has had on pension funds, which invest some 60% of their total capital in the equities market, surely does.

Economic uncertainty around the globe, prompted by a number of key factors emanating from the US, the Euro zone and the Middle East, has panicked investors somewhat, causing them to ditch shares in riskier asset classes in favour of what are historically viewed as safer investments, namely bonds, gilts, gold, commodities and property. This rush to sell has sent the price of shares into a tailspin, with all key global exchanges enduring something of a rollercoaster ride.

The impact of this turmoil has been bad for all but those that have the reassurance of guaranteed final salary pension schemes. In the last month alone, £120 billion was wiped off the value of UK pension savings in the last month alone and, according to research undertaken by the firm Towers Watson, the pensions deficit of firms listed on the FTSE 350 has widened by a daily average of £2 billion, increasing from £52 billion at the end of June to £73 billion as of the 10th August. Worse news for holders of pensions reliant on equity growth was the assertion made by Price Waterhouse Coopers that members of pension schemes would have been financially better off had they kept their money under a mattress rather than investing it!

Several key factors can be attributed to this recent volatility. Both private and institutional investors have been spooked by the debt crisis that continues to engulf the euro zone. There is real fear that the measures put in place by Germany, France and the rest of the Euro zone to assist Greece in overcoming its economic ills will simply serve as a short term remedy as opposed to a long term cure. With three of the four so called PIGS – Portugal, Ireland & Greece – enduring on-going economic dire straits, there is a very real concern that this economic contagion will spread to the larger, more significant European economies of Spain and Italy, where British bank, pension funds and private investors have far greater exposure.

However, it isn’t just the euro zone crises that have rattled the markets. The prolonged political upheaval that engulfed the US, as Republicans and Democrats struggled to thrash out a fiscal budget deal, and the unfathomable prospect that the world’s largest economy may be unable to meet its debt obligations, resulted in the country being stripped of its AAA+ credit rating for the first time in its history, and did little to assuage investor fears.

Closer to home, the economic picture on the whole for Britain is equally gloomy, with projected growth figures for the UK economy being revised down to 1.5% for 2011 and the latest job data signalling a rise in those out of work to 2.49 million.

The fall in equity prices isn’t the only factor to negatively impact on retirees and pension savers. As the government and the Bank of England seek to steer the UK economy out of its current economic malaise, it’s widely acknowledged that historically low interest rates are likely to remain at their current rate of 0.5% or thereabouts for the foreseeable future, which is bad news for those seeking to shelter their pensions from the vagaries of the stock market by putting their money in safer investment vehicles such as cash ISA’s and gilts, for the returns on these are meagre, this at a time when inflation continues to run at between 4-5%.

With fears of a double dip recession, volatile equity markets and commodity prices in essentials spiralling ever upwards, pension savers are advised to put appropriate defences in place to protect themselves against inflation for, as the firm Ernst & Young note, the longer inflation rates remain high the more detrimental the effect on a pensioner’s future buying power – they calculated that if rates averaged their current 5% over a 20 year period, a pensioner enjoying a level pension of £20,000 would eventually see their spending power fall by 60% after 20 years.

With life expectancy continuing to rise, it is imperative that individuals saving for retirement maximise the returns on the money they invest for their old age, limit the extent to which inflation impacts on their future spending power, and ensure that the portfolio they hold is in a diverse range of assets to cushion them against stock market shocks The current economic climate isn’t all doom and gloom for pension holders – holders of final salary pensions enjoy relative security and peace of mind, while for those not looking to retire in the immediate future, it is widely acknowledged that, over time, equities will ride out the storm. But with interest rates historically low, demand for rental properties high and rising, surely investment in bricks and mortar is the sensible option for those with the means to raise a deposit and who are seeking to enjoy stable, inflation beating returns?

Article Courtesy of Peter Law @ Bold Spirit www.boldspirit.co.uk