Investment advisers are telling personal pension holders not to panic as falling equity markets reduce the value of their retirement funds.

Many believe that the key to weathering the storm is to ensure that the asset allocation of a pension portfolio is appropriate. “It’s just like blending scotch and water,” says Jason Butler, a financial planner with Bloomsbury. “Getting the ‘blend’ right between growth and defensive assets is important.”

With equity markets so low, advisers warn that it is a poor time to be encashing shares. Pension investors with a high proportion of equities in their funds are therefore being encouraged not to sell at curent prices as they risk missing out when markets recover. Instead, those about to retire, or enter into income drawdown from their funds are being advised to take a lower level of withdrawals, and instead supplement their income from other sources until market conditions improve. Possible alternatives include taking the yield from individual savings accounts (Isas), skimming interest from cash deposits, or renting out a room in a home tax-free.

For those who must draw down an income now, Butler of Bloomsbury says it is advisable to take just 3 per cent or less of the fund’s value, and later rebalance the remaining portfolio by buying into equities and other risky assets, while selling defensive assets such as gilts. “It might sound mad, but it positions one well for the rebound,” he says.

Investment strategy should be based largely on age and temperament. Younger investors are advised to allocate more to equity markets as share prices look historically cheap and the probability that markets will recover in 10 or 20 years is strong. “If you are in your 20s, 30s or 40s, this is not a big deal,” says Tom McPhail, an adviser with Hargreaves Lansdown. “While it’s possible that your investments might be worth less 12 months from now, a powerful argument can be made that they will be worth a lot more in 20 years.”

But more risk averse pension holders approaching retirement might want to buy an annuity rather than enter income drawdown. Standard annuities are now better value as corporate bond yields have increased and increased life expectancy is not fully reflected in some insurers’ rates.

Alternative ways of generating a retirement income from capital include equity income and corporate bond funds, say advisers, as yields from both look attractive, The Artemis Equity Income fund is offering a yield of 5 per cent while corporate bond funds investing largely in investment-grade debt are yielding 8 to 9 per cent.

“There are few occasions in history when these yield levels can be bought,” points out Tim Cockerill, an adviser with Rowan & Co.

For pension asset allocation examples, see http://ww2.bestinvest.co.uk/planning/portplan/portplan1.htm.