Bond chaos has ruined pension savings and ruined retirements

The global bond market crash has caused havoc on British pensioners’ pots. Thousands of people are forced to decide whether they want to delay retirement or suffer huge losses.

After a string of positive economic indicators and signs that the American central banks will continue to keep interest rates high, the value of American government bonds and British Government Bonds have been in a downward spiral.

Bond prices fall when rates increase, as investors demand higher yields in order to compete with the higher risk-free rate. When prices drop, yields increase.

This has been disastrous for the millions of British pensioners who were “lifestyled”, or pushed, towards a portfolio heavy in bonds.

If you’re in “default” funds, defined contribution pensions invest in the stock and bond market, changing the way you save as you near retirement.

As bonds are perceived to be lower-risk, they are often used in life style. However, in the last two years, this has not been able to protect pension pots of savers who are approaching retirement due to major selling offs on bond markets.

Ian Cook of wealth manager Quilter said that the lifestyling approach had become outdated.

He said: “Pension provider created this method because people used buy annuities when they reach retirement that are priced according gilts.

The annuity rate has been very low for the majority of the last decade. In recent months they have grown in popularity, but most people still go straight to drawdown.

When pensioners begin taking an income, they are in a ‘drawdown’. They keep their money in the stock market and on bonds but start to withdraw from it.

Mr Cook stated: “Most workplace retirement schemes move their older savings into bonds by default. This has had a disastrous effect due to the sale off.

Some clients had to move their money piecemeal back into the market because they were lifestyled out. Other clients have been forced to postpone retirement or accept lower incomes.

Aegon, for example, automatically switches some of the savers from its default pension to its “Scottish Equitable Retirement Plan” when they are only one year away.

Savings in this plan, which heavily invests in gilts and money, have fallen by 7pc just in the last year. Over the last three years it has fallen by 41pc.

Retirement investors who invest their own money into self-invested pensions, or “Sipps”, have also been snared.

Vanguard LifeStrategy 80pc Bond Fund, for example, with its 80pc bond investment, delivered the lowest return in the Vanguard LifeStrategy range during the last two years. It lost 13pc. The LifeStrategy 80% Equity Fund, which has only 20pc in bonds, is flat.

Moneyfacts, an analyst, says that savers are now able to secure a return on average of 5,45pc for a one-year fixed saving bond.

Doug Brodie of Chancery Lane Financial Advisors argued that the 60/40 Strategy, which encourages clients to invest half of their portfolios in bonds, urgently needed reform.

He said, “The blind obedience to this mantra has paid off.” Since the start of the pandemic in 2009, US Treasury bonds have fallen by 46pc over the last 10 years. For some context, the stocks dropped by 49pc in the dot-com crash.

The main difference is the fact that stocks simply rose again. Bonds will not recover as quickly, it will be a slow and long process.

Pension providers invest in bonds because they’re less volatile and they have to pay a dividend by law. Dividends on shares are at the discretion of the company.

Only 10 percent of our total money is invested in fixed income. We are cautious when it comes to funds that invest in fixed income because we don’t think they are worth the risk. By that time, you might as well sit in cash because you won’t be hit by higher interest rates.

Some market observers believe that bonds will make a strong comeback next year. Michael Hartnett predicted last week that bonds will roar back by 2024.

He wrote: “Bonds will be the most profitable asset class during the first half 2024.”

The team of Mr Hartnett noted that the bank waited for investors to sell in masse, and a “recession” or “credit event” could trigger an economic recovery.

This will be of little comfort to those workers in Britain who are waiting for the perfect time to retire. Their savings are concentrated more in the gilt markets. Cook stated that it could take up to a decade before gilts recover. “We simply do not know.”

A spokesperson for Aegon stated that it sent letters to customers about their investment strategies in the months leading up to retirement. Each letter asks for confirmation of the retirement age. It also offers an opportunity to alter retirement age. The customer can then decide whether they want to keep their current fund or change it to one that matches their new retirement date.

“Aegon is responsible for ensuring that the investment goals are appropriate for the target market. He said that we cannot give financial advice to individual clients.