What the BP oil spill means for your pension

If the value of your pension has plummeted due to the BP oil spill, don't panic! Here's what to do.

Whenever there’s a major dip in the stock market, there’s always an awful lot of media hype over the impact on investment values. Recently, there has been plenty of speculation surrounding the oil spill disaster in the Gulf of Mexico, and how the subsequent fall in the BP share price could affect pension funds.

If your own pension plan is invested in the UK market, it’s likely to have at least some exposure to BP, which is one of the largest companies quoted on the FTSE 100 index of leading shares. According to The Times, almost every pension investor in the UK has a stake in BP's fortunes, as the oil giant accounts for £1 of ever £7 of dividend income paid out by companies in the FTSE100.

The clean-up operation in the Gulf has already cost the energy company an estimated £1.1 billion, while its share price has tumbled to 370.95p today (midday 14 June) - down from a year high of 658.20p (and as I write the price keeps on falling). Not surprisingly, the oil giant was the worst FTSE 100 performer again this morning, and continues to face very tough challenges ahead.

As if all that wasn’t bad enough, there are whispers of a possible credit downgrade for the UK, and an ensuing bear market if the emergency budget on 22 June fails to deliver. If a bear market occurs where share prices fall en masse for a time, you can only expect a negative impact on your pension.

But should these events - or any future stock market collapse - get you panicking?

Should you panic?

The most important thing to remember is that pensions are very long-term investments. Your plan may well run for several decades before you eventually retire. In this time there will be numerous short-term peaks and troughs. So, there’s no need to panic unduly when there’s a downturn which causes your pension value to dip.

In fact, you could look at it more optimistically and view any market slump as the ideal buying opportunity. After all, when share prices are low, you’ll be able to buy more with the same pension contributions, which are then poised to take off in value when the market recovers.

Is your pension invested well?

When stock market performance is weak, there will naturally be a knock on effect on the value of your pension pot. If the value is still lagging behind when the market eventually begins to climb again, this probably indicates a bigger problem.

Recent question on this topic

With that in mind, it’s always a good idea to review how your pension is performing on a regular basis (at least once a year). If your pension value is falling while the stock market is gathering pace, alarm bells should start to ring. This suggests your pension is not invested as well as it could be.

One way you can get around this is to invest your pension in index-tracking funds. Index-trackers are designed to replicate the performance of a share index as closely as possible by investing in all the company shares quoted on that index. Most UK index-trackers 'track' the FTSE 100 or the FTSE All Share indices.

In this way, when the index falls, the value of your pension will drop accordingly. The reverse is also true when the market recovers. This means your pension will never fall behind the market, but equally it won’t be capable of outperforming it either.

If you prefer something more adventurous than index-trackers, you have the opportunity to invest in a range of managed investment funds, or you could even invest directly in shares through a self-invested personal pension (SIPP). Find out more about that by reading How to pick the best pension fund.

Just remember, if you mix your pension up, make sure it’s properly diversified. It’s probably a good idea to speak to an independent pension adviser first, especially if you’re new to investing.

If you’re not happy with how your pension is performing, you always have the right to switch investments held within your pension wrapper. Again it may be a good idea to seek advice before doing so, but Why you should transfer your pension will give you a step-by-step guide, and highlights all the factors you should be thinking about before you change how your pension is invested.

Related goal

Get ready to retire

There are a lot of things to think about as you get closer to your retirement. But the early you start to prepare, the better.

Retiring soon?

I still think shares are the best place to invest your pension to maximise capital growth over the long-term. But it makes sense to reduce equity exposure as you get closer to retirement. This should protect your pension from a sudden stock market collapse just as you need to draw benefits from it.

To achieve this, most pension companies offer a process known as ‘lifestyling’ which normally kicks off around ten years before you retire. The idea is your pension assets are gradually switched out of shares year by year and moved into lower-risk assets such as fixed-interest gilts and bonds or cash. Take a look at How to protect your pension to find out more.

That said, if you’re happy to stay fully invested in shares right up to your retirement, you don’t have to choose a lifestyling option. But just bear in mind, if another BP or credit downgrade type disaster hits shortly before you’re ready to retire, you may regret failing to take any precautions to safeguard the value of your pension.

More: Boost your pension by £130,000 before you retire | Why pensions aren’t always worth it

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