Picture the scene. You open up your Penfold app to check how your pension is coming along and… GASP! Your pot has decreased in value. Naturally, you’ll be concerned. Why do I have less money in my pot today than I did last week? Is there a chance my pension will drop until there’s nothing left? Let’s take a look at what’s really going on. Here’s what you need to know and do if your pension pot has gone down.
Ok, what's going on. Why has your pension fund value dropped? As you’re probably aware, the majority of your pension is invested. Rather than storing all your money in a savings account, everything you add to your pot is used to buy 'units' from your chosen pension fund. These units are like a bundle of different investments, including stocks and shares, government bonds or even property. Think of them like investing blocks. The more blocks you have, the bigger your pension. Of course, the size of the individual blocks will also change over time, depending on how your investments perform.
The value of your defined contribution pension at any time comes from two things:
Investing in a fund helps your savings grow, giving you a bigger pot in retirement and preventing inflation from eating into your hard-earned money. If the investments inside your pension fund drop in value, the value of your pension pot will also dip. This can come from a number of factors, such as trends in the stock market, economic downturn or new political policies. Of course, these factors can also lead to your pension pot increasing - it’s all about risk. Finding a balance between risk and reward is a crucial part of saving for the future.
Ok, it’s useful to understand the things that influence the performance of your pension, but what can you do about it? Let's take a look.
The first step to take if you discover your pension is losing money is to not panic. The worst thing you can do after a dip is attempt to access or move your money. That's because once your savings are taken outside of your pension, any losses become realised.
While your money is invested, any losses are essentially on paper - they only become 'real' when you withdraw or move your money. Often, simply leaving your money and waiting is the best course of action. That way, you give your pot a chance to recover. Generally speaking, small drops in value are nothing to worry about when you’re investing for the long term.
At Penfold, we strive to be completely transparent with our pension performance. However, by giving our savers complete visibility into their pension, chances are you’ll notice the frequent and expected ups and downs more often.
Again, this shouldn’t be something to worry about. A single month of poor performance isn’t going to be critical when you’re saving for 20, 40 or 50 years. Fluctuations are a normal part of investing and pensions are no different. It’s why your return on your contributions will vary over time. There will always be ups and downs but over the long haul, investing has consistently delivered a net gain for savers.
The chart above shows the returns of Penfold’s pension plans since we started offering them. These are also the pension plans used in our Workplace pension. As you can see, there are a few occasions where the value drops, before swiftly recovering. Right now the UK in in a recession, causing investment markets to struggle across the board. If you had tried to move your money during December 2018 or June 2020, you may have missed out when the fund bounced back.
In fact, these natural drops in the market can be a good thing, offering you a chance to buy more units of your pension fund at a lower cost. Penfold’s plans use a variety of diverse investments to help protect you from most of the extreme ups and downs. The only time you’ll want to pay a little closer attention to any drops is when you’re a few years from retirement.
If you’re getting ready to access your pension, we recommend shifting the investments inside your pension fund into a less volatile plan. Our recently launched Lifetime Plan does this for you, adjusting your investments automatically over your life. You may also want to put off retirement for a short while until markets recover.
For most, however, the best thing to do if your pension pot value drops is… nothing.
Another completely normal response to seeing your pension dip in value is: will I lose everything? Pensions, like all investments, involve risk. Very briefly, this means there is a (small) chance you could lose some of the money you invest. But here’s the thing to remember: over the long term, diverse investing has a nearly negligible chance of losing you money. In fact, investing tends to outperform other methods of saving.
"Over the long-term, investing offers the best chance of real, inflation-beating returns"
Over the past 40 years, pensions have seen an average return of 7%. This means saving pots have grown 7% bigger - not bad when most regular saving accounts in the UK are offering around 0.5% interest.
At Penfold, our most popular plan has achieved an average yearly growth rate of 10.8% (based on the last 5 years).
Assuming the average growth rate of 7%, contributing £250 a month for 40 years would mean your pension would earn just under £500,000 from growth, mainly thanks to compounding. Remember, time is your friend.
While it’s vital to be aware that there is an element of risk whenever you invest your money, it’s equally important to know that the longer you invest in a pension, the lower the chances of losing money.
You may have read in the news or heard from someone you know that “pensions are falling” or “pension funds have dropped”. What does that actually mean? Infrequently, global financial markets will have a bad run that affects investments everywhere - seen most recently during the global Covid pandemic and the aftermath of the conflict in Ukraine.
If you notice your savings have taken a hit, just know this isn’t only limited to your Penfold pension or even pensions in general. All investments and savings globally will feel some impact during an economic crisis.
However, the key thing to remember is that pensions are a long-term investment, and they will go up and down in the short term. Over time, any widespread drops should correct as financial markets recover.
Past performance is not a guarantee of future performance.