The 30 per cent fall in the stock market over the past 12 months is bad news for those coming up to retirement. Since a large chunk of pension fund cash is invested in equities, a fall in share prices translates into a drop in future retirement income.

The pain is most likely to be felt by those in a money-purchase scheme, where the pension is entirely dependent on the size of the pension pot that has been built up. It is estimated there are up to 20 million people with an occupational or personal pension of this kind.

But the current market turmoil may affect even some of the 8.5 million people in a final- salary scheme, where their pension is dependent on their salary and years of service. If, for example, their company collapses, they could find that they do not receive as big a pension as they were expecting.

There are safeguards in place, including the ring-fencing of pension schemes from other parts of the company, but those just coming up to retirement could face problems if their pension scheme is in deficit and the company fails. There would then be no employer to make good the deficit and employees would have to turn to the Pension Protection Fund (PPF) to fill the gap. For those not yet in retirement, the PPF would guarantee 90 per cent of their expected pension, though the amount payable is capped at £27,770, so high flyers looking forward to a £50,000 pension in retirement could be disappointed.

But the consequences of the stock market fall will be most heavily felt by those in money-purchase schemes, particularly those largely invested in shares. Most financial advisers recommend gradually switching assets from shares to bonds and cash as people approach retirement but not all individuals follow this advice.

A 65-year-old with a pension fund of £200,000 in July last year could have converted this into a pension of about £15,200. But, if this fund had been invested in a typical managed fund, it would, by Friday morning, have fallen in value to £164,000, producing a smaller pension of £12,792.

Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says: “For those who have got a large chunk of shares in their pension pot, it’s a case of stick or twist. If you have only a year or two to retirement and you need to convert your pot into an annuity at that point, you basically have two choices.

“One is to accept your losses and avoid further pain by selling your shares and putting the money into cash. If you do this, you have to recognise that your pension will be smaller than it would have been if you had cashed in when the stock market was at its peak.

“The other option is to hold on and hope for a recovery, though with only a couple of years to retirement, time is not on your side. You also have to accept the risk that the stock market might fall further, thus leaving you with an even smaller pension pot.”

Those who are able to might consider working for longer than they had originally planned, thus enabling them to make more pension contributions as well as allowing more time for the market to recover.

Another possibility for those with a pension pot of about £200,000 or more is income drawdown. This means the money is kept in a pension pot but an income may be drawn from the fund.

Mr McPhail says: “You can take out 25 per cent of your fund upfront when you go into drawdown and you could live off this for some time and hope that the stock market recovers, so that the remaining fund increases in value. But it’s a gamble and the market might not recover.”

All types of money-purchase pension schemes have to be converted into an annuity at the age of 75, so those approaching this age who have not yet cashed in their pot face the same dilemna as many of those who are planning to take their annuity at 65. Falling stock markets could mean they end up significantly worse off in retirement than they were expecting. To tackle this problem the Conservatives this week called for the Government to call a temporary halt to forced annuitisation at 75. Chris Grayling, Shadow Work and Pensions Secretary, said: “It makes no sense to penalise someone whose birthday happens to fall within the current period of extreme turbulence.”

For those anxious about their future pension, Hargreaves Lansdown is opening a telephone helpline - 0117 900 9000 - on Monday and Tuesday from 9am to 8pm and anyone is free to call.

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