China’s Black Monday

1 August 2015

China's Black Monday - How Will It Affect Pensions? China's 'Black Monday' has sent markets reeling across the globe, as anxieties about China's slow growth has triggered a worldwide sell-off. China's main stock exchange, the Shanghai Composite fell 8.5% on Monday and 7.6% on Tuesday and is the worst drop since 2007 with implications around the globe.

Although there is not enough foreign investment in the Chinese market for there to be direct problems caused by this in the rest of the world, it does force us to look at the wiser issues that such crashes cause, and one of the potential impacts is upon pensions.

In the UK, the issue of pensions has never been more prevalent in the public's mind. The rollout of auto enrolment which is ongoing will result in more and more people actively saving for retirement than ever before. The other big pensions news story is pension freedoms, which now means that savers no longer are forced to buy an annuity on retirement and are now free to save, invest or spend their pension pot as they wish. And it's auto enrolment and pension freedoms that could result in some savers doing irreparable damage to their financial prospects when combined with news stories such as 'Black Monday'.

The first issue is that there is the potential that the rate of people auto enrolling declines. Some people may be put off pensions altogether if they perceive the markets where their money will be invested as volatile. However, it's unlikely that this will happen because of the automatic element of auto enrolment which sees savers automatically brought into their workplace pension scheme rather than them having to opt-in.

Where there may be an issue is when pension benefits come into payment. Some savers, seeing the huge losses on the stock markets may be tempted to cash in their pension for cold hard cash, but drawing capital in a falling market can have a significant impact and increases savers' chances or eroding their pension quickly and running out of money. Essentially, it means people are locking in their losses and is like someone selling a house in 2008 as the house market crashed, their financial position would have been much stronger if they'd have held onto the property rather than selling it. Pensions, like property have to be thought of in the long term.

It remains to be seen as to whether China's 'Black Monday' is an economic blip or the start of a full-blown crisis, and whether there will be consequences for savers across the world.

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