What the Iran conflict means for your retirement and spending

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.  

If you have a defined contribution (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. 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. 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 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.

Approaching the point of accessing your pension

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.  

Many people in old workplace pension schemes will be invested in a fund that is designed for purchasing annuities. If this is the case, your investments will likely be exposed to changes in annuity rates so that when annuity rates go down, your pension pot is boosted further. This exposure where an asset going down causes a boost is called ‘hedging’. But, annuity rates usually move in tandem with interest rates, so in this case, they are primed to rise. This means that if a fund has this ‘hedging' in place for annuity rates, there’s a chance that the value of the fund will 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.

Already taking an income from your pot

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

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.

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.

How your spending might change

The most immediate impact for people in the UK is seeing their energy bills tick up thanks to rising oil prices.

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. 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.

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.

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. It means households with long commutes or heavy reliance on cars could see their monthly spending climb.

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.

Interest rates and the effect on your mortgage

A resurgence in inflation would also have implications for borrowing costs. Where previously markets were pricing in two interest rate cuts this year, the latest market outlook expects no cuts to rates all the way through to April next year.

No interest rate cuts 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 might want to consider locking in a rate now, and they can always re-visit it later if interest rates do drop.