Why Low Oil Prices Could Be Bad For You

The recent oil rout has been championed as good news for the UK economy, but if you care about your retirement you may feel differently.

Despite the Bank of England's deputy governor insisting that the fall in oil prices has been a "net good" for the UK economy, there's a chance your pension pot has felt some pain.

That could result in a lower retirement income or having to retire at an older age than you hoped.

Since the FTSE 100 reached its peak last April around £317bn has been wiped from the value of the UK's most valuable companies.

One of the main drivers behind the index's collapse is the fall in the value of oil and commodities.

The oil price has slipped 38% in the last year, while commodities are trading at their lowest levels since 1991 - and many people's pension savings are invested at least to some extent in commodity and oil stocks.

The FTSE is weighted towards oil and mining stocks, with around 14% of its value comprised of such stocks.

This puts UK pensioners at a disadvantage versus their European counterparts since the French and German stock markets are less focused on these sectors.

Some funds, such as Neil Woodford's Equity Income Fund, ignore the oil sector completely and opt for tobacco and pharmaceutical stocks, while Artemis' UK Growth Fund invests nearly 3% of its money in Shell shares.

Earlier this week both Shell and BP chose to maintain their attractive dividend policy, but if oil prices remain at such low levels many investors are asking the question: how long can this last?

Pensions expert Tom McPhail, referring to BP and Shell, said: "Earnings aren't covering dividends and they are playing chicken with the oil price in the hope that values and therefore earnings will eventually recover in time to bail them out.

"Without that, their current dividend strategy is clearly not sustainable."

BP's dividend payouts no longer account for £1 in every £6 worth of income received by UK pension funds, as was the case at the time of the Gulf of Mexico spill.

But they still account for about £1 in every £13 received - making the income it generates vital for many across Britain, not to mention more than a quarter of a million private investors who own the shares directly.

There is also the increase in the popularity of self-invested pension plans following last April’s pension freedom reforms, which could mean that some people have chosen to put all their eggs in one oil basket.

For example, £1,000 invested in Shell shares this time last year would now be worth just £694.

With fears of Britain leaving the European Union likely to promote further uncertainty in the near term, anyone with a pension fund linked to oil has good reason to be sitting uneasily.