Calls for calm as markets spark new crisis fears

SAVERS and investors have been urged to remain calm as fears grow over the potential implications of the latest tumultuous episode in the global financial crisis.

Sharp stock market falls and the debt crises in Europe and the United States, not to mention concerns that political wrangling will continue to undermine the latter's efforts to dig itself out of trouble, have sent waves of panic through global markets.

How long and how deep the difficulties will be is anyone's guess, and the uncertainty has sparked memories of the credit crunch that kicked off in 2007 and the 2008 banking crisis.

Millions of Britons are now wondering if they can expect a repeat, with worries over what it will mean for their finances. Here are some of the key issues being raised:

Does this mean I could lose my pension savings?

For the vast majority of people it doesn't, as values will recover over time, as they did after the banking crisis. However, if you're retiring over the coming weeks it's a different matter if, like most people these days, you're in a defined contribution pension where the returns are linked to investment performance.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, pointed out that for anyone with a long wait until retirement the latest stock market falls will be long forgotten when they come to take their pension.

"Those close to retirement have greater cause for concern, though they may have been sheltered to some extent by de-risking their pension investments. Pension investors should regularly assess their investments to make sure they still suit their personal circumstances and attitude to risk, particularly in the run-up to retirement," he said.

But if you're due to take your pension benefits soon and have money exposed to the markets - although ideally you will no longer be in equities so near to retirement - you're likely to retire with a smaller pension that you might have expected.

That problem is exacerbated by fresh falls in the rates paid by annuities, which most people buy at retirement to convert their pension fund into a regular income.

Annuity rates are being pushed down by lower gilt yields, which are used to determine annuity income levels.

Several annuity providers have reduced their rates in the last week and bigger falls have been forecast in response to sharp falls in ten, 15 and 30-year gilt yields.

Hargreaves Lansdown said that for anyone considering buying an annuity soon there is a "strong argument" in favour of doing so sooner rather than later. Annuity quotes tend to be guaranteed for at least two weeks, although one provider, MGM, guarantees quotes for up to 45 days.All of this means it's never been more important to shop around for the best annuity at retirement, instead of automatically taking the deal offered by your pension company. With a margin of up to 20 per cent between the best and worst annuities, getting the best deal can be a huge boost for your pension income.

You can improve it further if you're a smoker or in ill-health by securing an enhanced annuity, which pays out more on the assumption that the payout period will be shorter. If you're nearing retirement, get advice from an independent financial adviser or an independent annuity broker. Find an IFA near you at www.unbiased.co.uk

You have less to worry about if you're among the fortunate few in a final salary pension, where the return is based on earnings rather than investment returns. However, the impact of the crisis could force more employers to scale down their schemes.

Should I take my money out of the stock market?

Unless you're nearing retirement and need to de-risk, this is perhaps the worst thing you can do. Not only does it mean crystallising what is currently just a paper loss, but it also means on missing out on the recovery.

Is there any other form of market that people scramble to get out of just as prices become cheaper?

Ned Davis Research, a US based economics house, looked at eight previous occasions when the US stock market fell by more than 3 per cent in one day. It found that after five days it recovered the 3 per cent loss; after three weeks it was up an average of 4.2 per cent and over 63 days rebounded 8.8 per cent on average.

Investors who panicked at the initial loss missed out on those gains. Those who stayed in - especially making regular investments and being able to buy more at the lower prices - were rewarded for their patience.

Adrian Lowcock, senior investment adviser at Bestinvest, said investors should ensure their portfolios are diversified across different asset classes. "The focus should be on those areas that have proven they can weather market downturns. Ensuring you minimise losses to taxation and charges is also vital, as is the need to block out the short-term noise. Keep the focus on your long-term financial objectives and you won't be blown too far off course," he said.

It can also be argued that despite the hype, equities are currently good value. Khalaf said: "In situations such as this, the share prices of good companies fall along with bad. For brave investors this creates interesting opportunities. The UK market is now over 10 per cent cheaper than it was a week ago. It could fall further, however this could also be a good long-term entry point."

Is it a good time to buy gold?

The yellow metal is always a popular safe haven in times of uncertainty and demand has pushed the price up to records highs in the last two weeks. And while buying at a high point rarely makes sense, some experts believe the gold price is on course to break through the $2,000-an-ounce mark.

It's also an effective hedge against inflation, and investors can access it through buying gold bullion or through collective investments including exchange traded funds and unit and investment trusts. But it should only form a part of a diversified portfolio, sitting alongside other assets.

Are my savings safe?

The credit crunch triggered a strengthening of the protection around bank deposits, with the Financial Services Compensation Scheme now covering up to 85,000 of money held in each institution.

Note that the protection is per person, per UK-registered institution, not per bank. If you have more than 85,000 in deposit savings, spread it around different institutions and check with the Financial Services Authority that they have separate licences. www.fsa.gov.uk/pages/consumerinformation/uk_groups/index.shtml

Does it affect my mortgage?

For some borrowers there's a silver lining in the dark cloud in the form of cheaper mortgages. The falling gilt yields that have depressed annuity rates have also pushed down borrowing costs, with fixed-rate mortgages reaching fresh lows.

Ray Boulger, of mortgage broker John Charcol, said it was a good time to consider tying into a fixed-rate loan. "Just as UK gilt yields are the lowest for over 50 years, the fall in swap rates has resulted in the best five-year fixed-rate mortgages falling to their lowest ever level.

"We have also seen more competition in the market at LTVs above 75 per cent, particularly from the building society sector."