Pensions and the stock market revival

Personal pension pots have suffered in the last year as the stock market has fallen. But in the last three months the index of leading shares has risen at its fastest for 25 years - recovering some lost ground. Business editor Paul Hill reports.

What will the history books make of the summer of 2009?

Have we seen the early signs of recovery or a false economic dawn?

The stock market has not only recovered some of ground lost after last autumn's banking crisis, but rose at its fastest rate between July and September since the FTSE100 index was created in 1984.

The stock market recovery seen this summer - a rise of 21pc - has outstripped the rising markets seen at the height of the dotcom bubble in the last quarter of 1999 and the peak of Thatcher boom in 1987 before the Black Monday crash.

This week, markets have dipped as investors banked some of their gains.

But analysts still forecast that the FTSE100 may well reach 5,500 points by the close of the year - and the likes of British Airways, Cadbury, Petrofac and Whitbread have seen their share prices rise by between 51pc and 70pc in the space of three months.

For anyone saving for retirement, the market gains - if they continue - make for happy reading.

When the markets plummeted from more than 6,500 points at the beginning of 2008 to about 3,500 in March this year, the value of people's pension pots would also have fallen.

How many employees would have looked at their annual pension statement for the year and seen that they had paid in more money to their pot than the pot appeared to be worth.

The market rebound has redressed that - and, as Paul Goodwin of Aviva, explained anyone who maintained their pension payments should now be reaping of continuing to build their portfolio when their contributions could buy more shares for less.

“People who were contributing to their pension last year were buying units at a very cheap price,” Mr Goodwin said.

“When you get a record bounce in the market as we have in the last quarter, they will benefit fantastically from that.

“Every £100 was buying more units, now those units are worth considerably more - then add in the tax relief. We've seen customers with real net benefits over the last quarter.

“But that was just one quarter - markets can still be volatile and pensions are a long-term investment. Yes, we've seen a quarter of record returns, but still make sure your pensions are on track to give you what you need in retirement and get a projection from the state pensions office to find out what your state pension will be - find out what your whole position will be.”

Mr Goodwin said: “What people needed to do was take the view that pensions are a long-term investment - that can be a difficult thing to do when you're in a difficult economic climate.

“But we've been trying to reassure people that pensions are still a good investment long-term.

“Also, don't forget the value of tax relief that can add considerable to the value of every contribution that you make.”

But he also sounded a note of caution for people who had been made redundant and who had been paying into a personal pension.

“The critical thing for someone who is in a redundancy position and contributing to a personal pension, they need to review their finances and make economies where they can,” Mr Goodwin said.

“But find out what the options are - but your pension should be one of the things you should cut back on. People really need to understand the long-term effects of a short-term reduction.

“If a 40-year-old stops paying a £200-a-month contribution for a year, it ends up costing their retirement fund £20,000 when they stop working at 65.

“Cutting back on pensions and mortgages should be the last resort.”

But was the record rise in the stock market in the last three months just a blip?

Unemployment, after all, is likely to rise further in the coming months and the promised public sector spending squeeze could put a damper on any recovery.

Will markets fall again?

Richard Larner, divisional director of Brewin Dolphin Norwich, said: "There are all sorts of precedents for October being a more choppy month for markets - particularly Black Monday on October 19 1987 and we've seen other financial crises in other years in October. It's a pattern that's occurred before.

"We would expect to see about the 5,500 level at year end - somewhere around that, perhaps 5,400 would be more cautious.

"We envisage there will be some profit-taking, but once that's been digested then the market should move further forward. Firstly, there's a continuing strong news flow from quoted companies and secondly, we have historically low interest rates which is encouraging investors to put money into the market.

"For us, it's almost a daily event for a client to call and say they're earning such poor returns on their deposits can we help. Typically, in the past they would have retained quite large cash deposits, but clearly they are frustrated by the returns. Generally speaking, it's existing stock market investors who are adding to their portfolio.

“Yes there are some new investors coming forward, but it is interesting to see the extent to which existing clients are putting more money in the market."