As events in the Middle East continue to create uncertainty about the direction for the global economy, AJ Bell’s experts – director of public policy, Tom Selby, and director of personal finance, Laura Suter – look at what it means for your pension and personal finances. This includes:
- Saving for retirement
- Approaching the point of accessing your pension
- Already taking an income from your pot
- The pensions that shouldn’t be (directly) hit
- Energy bills
- Fuel prices
- Inflation
- Interest rates and mortgages
- Supply chain and currency disruption
Tom Selby, director of public policy at AJ Bell, comments:
“Given the scale of the instability we are seeing in the Middle East – and specifically the knock-on impact on oil supplies and global confidence – it is inevitable there will be a short-term impact (at the very least) on people who are invested in global markets, which includes anyone with a ‘defined contribution’ (DC) pension.
“If you have a DC pension – either set up through your employer or privately – you will likely be invested in a diversified portfolio of stocks, funds and bonds, with the aim of delivering positive returns over the long term. Even if you have been ‘automatically enrolled’ into a workplace pension scheme and have done nothing, your money should still be invested in a ‘default fund’ (an investment portfolio chosen by your employer designed to be broadly appropriate for its employees).
“We have already seen wobbles in global stock markets as a result of the US and Israel launching attacks on Iran. The blue-chip FTSE 100 index, for example, has gone from almost breaching the 11,000 mark at the end of February to being closer to 10,000 today. As a result, there is a fair chance if you log into your account to see your performance there will be a dip in the last week or so.
“At times like this it is crucial to remain focused on your long-term goals. A short-term hit to your investment value shouldn’t be a cause for alarm. When markets go through tough patches such as now – and as we have seen plenty of over the last decade – it’s important not to get swept up in a wave of panic. While we don’t know if the Iran war is going to be a short-lived event or prolonged, it is always prudent to give your portfolio a health check to ensure that you’re happy with the shape of it and the risks you are taking. Spreading these risks across sectors, geographies, and asset classes (such as bonds and gold) could help to limit any blows. History suggests that staying invested is a better course of action than trying to time when to go in and out of the market. If the idea of picking your own investments is a bit daunting, most firms now offer ready-made portfolios aimed at different risk preferences.”
Approaching the point of accessing your pension
Tom Selby, director of public policy at AJ Bell, comments:
“As you approach the point of accessing your retirement pot for the first time, it’s important to check your investment approach matches your plans. Provided this is the case, any short-term instability in global markets shouldn’t force a radical change of strategy.
“However, people could run into problems if their investments and retirement plans are not aligned. For example, if someone is invested 100% in equities but plans to turn their pension into a guaranteed income for life by purchasing an annuity within a year, they would be a hostage to short-term market fortune.
“Equally, if you are invested in a fund which is targeting annuity purchase in the coming years – as many people in old workplace pension schemes from insurers will be – your investments will likely be ‘hedged’ against movements in annuity rates. With interest rate expectations rising as the spectre of higher inflation looms, annuity rates will likely follow suit – meaning funds aimed at hedging against annuity rates should, all things being equal, fall.
“If you are planning to buy an annuity then that’s all well and good, but if you no longer intend to do so – and most people today choose the flexibility of drawdown when they access their pension – you could be sitting on a substantial fall in the value of your investments. For anyone in this position, the options are to either sit tight and hope the value of your investments recovers or shift your portfolio so your investments match your retirement intentions and accept that you might need to wait a bit longer to access your pension (or take a slightly lower income).”
Already taking an income from your pot
Tom Selby, director of public policy at AJ Bell, comments:
“If you are taking a retirement income while keeping your pension invested through ‘drawdown’, it’s worth using the current uncertainty as an opportunity to review your strategy to make sure it remains sustainable. If your investments have taken a big hit, for example, you may need to reduce the amount you take out of your pot to ensure you aren’t risking running out of money in retirement.
“For anyone who has used some or all of their pension to buy a flat annuity, the big worry will be a prolonged period of higher inflation. If we see prices rise significantly, that will eat into their spending power and leave them worse off as a result.”
The pensions that shouldn’t be (directly) hit
Tom Selby, director of public policy at AJ Bell, comments:
“If you are lucky enough to have a ‘defined benefit’ (DB) pension, where you receive a guaranteed income from your ‘normal retirement age’ based on the number of years you are a member of the scheme and your salary, what is happening in Iran should not have any direct impact on your retirement plans. If the employer responsible for paying your DB pension went out of business for any reason, provided there are sufficient funds in the scheme to pay pensions you should not be affected. Where there aren’t sufficient funds, there is a compensation scheme (the Pension Protection Fund or PPF) that acts as a safety net and ensures you will not lose everything (although your retirement income may be reduced).
“Your state pension entitlement should also not be directly affected by international conflicts like this – although clearly there could be ramifications for public spending in general, including the state pension, if borrowing costs soar and the UK is forced to reduce spending on some benefits as other areas, such as defence, are pushed up. The continued presence of the triple-lock means that the benefit will rise by 4.8% in April and will mean the value of the state pension will at the very least keep pace with rising prices.”
Energy bills could rise again
Laura Suter, director of personal finance at AJ Bell, comments:
“The most immediate impact for people in the UK is seeing their energy bills tick up thanks to rising oil prices. Clearly, the Middle East is central to global oil and gas markets, and disruption linked to the crisis in Iran has already pushed wholesale energy prices higher.
“Because gas sets the price for a large portion of electricity in the UK, any increase in wholesale gas prices can quickly feed through to the figures on your household bills. The energy price cap from Ofgem helps to protect people from an immediate increase in energy costs, so people won’t see the change on their bills just yet. And anyone who has locked in a fixed-rate tariff will be protected from the impact for the duration of that deal. But if higher prices continue, the energy price cap set by Ofgem could increase later in the year. The price cap has already been announced for April to June, set at £1,641 a year for those on a dual fuel contract for gas and electricity. The rate for the next quarter will be announced at the end of May, with it being based on prices from mid-February to mid-May.
“We have very recent experience of the impact of a rising oil price on energy bills. We saw during the start of the Ukraine-Russia conflict the impact it had. During that period the government protected bill payers from the worst of the increases through its own price cap, so if energy prices reached the same level we could see some government support. The government had already pledged to cut an average £150 from energy bills from April, but this could be wiped out in a few months by the effect of rising oil prices.”
Drivers could feel the impact at the pump
Laura Suter, director of personal finance at AJ Bell, comments:
“Oil prices are also highly sensitive to events in the region, and oil hit more than $100 a barrel early this week for the first time since the start of the Ukraine conflict in 2022. It’s exacerbated this time because a significant portion of the world’s crude oil passes through the Strait of Hormuz. Any threat to shipping through that route can push prices higher almost instantly – and it has.
“For UK consumers, that tends to translate into higher petrol and diesel prices within weeks. Even relatively small increases in the price of crude oil can add several pence per litre at the pump, pushing up commuting costs and leaving drivers paying more to fill up their tanks. It means households with long commutes or heavy reliance on cars could see their monthly spending climb.
“During the peak of the Ukraine-related oil price rises we saw the government step in by reducing fuel duty, in a bid to cut costs at the pump. They could roll out a similar measure to help motorists, if we see these price rises continue for a longer period of time. However, questions were raised at the time about how much impact the fuel duty cut actually had on forecourt prices, meaning there may be some reluctance to fund it again.”
Inflation could jump
Laura Suter, director of personal finance at AJ Bell, comments:
“Higher energy and fuel costs rarely stay confined to those sectors alone. Instead they spread through the wider economy, raising costs for businesses and ultimately pushing up prices for consumers. Energy costs have a huge impact on all parts of the supply chain. Transport becomes more expensive, factories face higher power bills and food producers see costs rise across their supply chains. All of that can push inflation higher, just as it had begun to fall back from the peaks seen after the pandemic and the war in Ukraine.
“We saw exactly that knock-on effect play out with Ukraine, with higher energy costs leading to higher inflation – meaning that the CPI measure of inflation peaked at 11.1% in October 2022. It takes time for these price increases to filter through and for it to be shown in the inflation numbers – in the case of Ukraine inflation hit its peak around seven months after the oil price first spiked. We need to wait and see whether the conflict is resolved swiftly, and so oil prices return to more normal levels, or whether the war rolls on for months, in which case the impact on energy prices is likely to be more drawn-out.”
Interest rate cuts could be delayed
Laura Suter, director of personal finance at AJ Bell, comments:
“A resurgence in inflation would also have implications for borrowing costs. Before this conflict began, it was widely expected that interest rates would be cut at the next meeting in March – as they had only marginally been held in the last meeting, with five votes to four in favour of maintaining rates at their current 3.75%. However, the market expectation of this rate cut has now plummeted.
“It will be too soon for any impact of the Iran crisis to be seen in inflation figures ahead of the March meeting, but the uncertainty surrounding the crisis and its impact on the UK economy may mean the rate setters at the Bank of England decide to pause their rate cutting until the impact is more certain. Where previously markets were pricing in two interest rate cuts this year, the latest market outlook is for no cuts to rates all the way through to April next year. In fact, from early 2027 markets are pricing in a slim chance of an interest rate rise – moving in the opposite direction to what many expected.
“Even without any rises, no interest rate cuts for this year would mean mortgage rates remaining higher for longer than many homeowners had hoped, particularly those coming off fixed-rate deals this year. Some mortgage deals have already been withdrawn, as lenders forecast higher interest rates this year than was previously expected. It means anyone up for remortgage in the next six months should lock in a rate now, and they can always re-visit it later if interest rates do drop.”
Supply chain and currency disruption could push up prices
Laura Suter, director of personal finance at AJ Bell, comments:
“The conflict could also disrupt global trade routes and supply chains, particularly if shipping in the Gulf becomes more difficult or expensive. Even small changes to global shipping routes can increase transport costs and delivery times for goods heading to the UK. That can filter through to higher prices on shop shelves, affecting everything from clothing and electronics to household goods.
“At the same time, currency moves can impact the cost of goods in the UK. Periods of geopolitical tension often spark volatility in currency markets as investors shift money into perceived safe-haven assets. That can weaken currencies such as the pound against the US dollar – and we’ve already seen this play out last week. A weaker pound means imports become more expensive for UK businesses, which can again push prices higher for consumers. It can also raise the cost of overseas travel and holidays.”
