Why does my pension value go up and down?

Ever opened your Penfold app, checked your pension value and done a double take?

Seeing your pension pot go down, even when you've been paying into it, can feel confusing. And if it's fallen more than you expected, it's natural to have questions.

Changes in your pension value are a normal part of investing. Here's why they happen, what they mean for your savings and what to consider when markets fall.

How does my pension's value change?

Unlike a traditional savings account, your pension doesn't simply sit there earning interest. Your money is invested to give it the opportunity to grow over time.

When you or your employer contribute to your pension, that money is used to buy units in your chosen pension fund.

Depending on your fund, your money might be invested in a mix of assets, including:

• Shares: Investments in companies, which can rise or fall in value
• Bonds: Loans to governments or companies, which can also change in value
• Cash and other assets: Investments that may help manage risk and provide diversification

The value of these investments changes over time. And because your pension holds units in these funds, its value changes too.

Your pension value is also affected by money going in or out and any fees charged.

That's why your pension pot can go down even when you haven't withdrawn any money.

What causes pension investments to fall?

Financial markets are influenced by lots of different things, and they don't always move in a straight line. Some common reasons investments fall in value include:

• Economic uncertainty: Concerns about economic growth can affect confidence in financial markets
• Inflation and interest rates: Changes in the cost of living and borrowing can influence the value of shares and bonds
• Company performance: Businesses performing below expectations can see their share prices fall
• Global events: Political developments, conflicts and other unexpected events can cause market movements

Sometimes markets respond quickly to new information. Other times, changes happen gradually over months or years.

These movements are a normal part of investing, although the size and duration of any fall can vary.

What should I do if my pension value drops?

If your pension value falls, you don't need to make an immediate decision.

Seeing your savings decrease can be worrying, but pensions are generally designed for long-term investing.

If you're still many years away from retirement, your money may have time to benefit from future market growth. However, recoveries aren't guaranteed, and investments can continue falling in value.

Before making changes to your pension, it's worth thinking about three things:

1. Your retirement timeline: How long is it until you expect to start using your pension?
2. Your investment goals: Are your current investments still suitable for what you're trying to achieve?
3. Your comfort with risk: Are you comfortable with the possibility of further falls in value?

Making rushed decisions based on short-term market movements could affect your long-term savings.

The important thing is to understand your options and make decisions based on your circumstances, rather than reacting to a single change in value.

Should I switch to a lower-risk pension fund?

When markets fall, moving your pension into lower-risk investments might feel like the safest option. But switching funds during a downturn can have consequences.

If you move your money after your investments have fallen in value, you may miss out on potential gains if markets recover.

Equally, keeping your money in higher-risk investments means your pension could fall further.

There isn't one approach that's right for everyone.

Your investment choices should reflect your circumstances, including how long you have until retirement and how comfortable you are with investment risk.

Lower-risk investments can generally experience smaller price movements, but they're not risk-free. They may also offer less potential for long-term growth.

That's why it's worth understanding how your pension is invested before deciding whether to make a change.

Why does long-term investing matter?

When it comes to pensions, time can make a difference.

Financial markets have experienced periods of growth and decline throughout history. While investments have often recovered from downturns, there's no guarantee of when, or whether, that will happen.

Investing over many years gives your pension more time to benefit from potential growth and compound returns.

Compounding happens when the returns your investments generate are reinvested, giving them the opportunity to generate further returns.

Over time, this can make a meaningful difference to your pension savings. You can learn more in our guide to compound growth.

Of course, compounding can also work in reverse when investments lose value. And investing for longer doesn't remove the risk of losing money.

The key is to look at your pension as part of your longer-term retirement plans, rather than focusing only on day-to-day changes.

How have pension investments performed in the past?

Looking at historical investment performance can help put market movements into perspective.

Over the years, financial markets have experienced periods of both growth and decline. Events such as the COVID-19 pandemic caused significant market falls, followed by recoveries in many investments.

The chart below shows how different Penfold investment portfolios would have performed over this period, based on historical market data.

As you can see, different investment portfolios can experience different levels of volatility.

• Growth: Designed for greater long-term growth potential, with a higher level of investment risk
• Balance: A mix of investments designed to balance growth potential and risk
• Protect: Designed to reduce exposure to larger market movements, with a lower level of investment risk

The chart illustrates how investment values can change over time, including periods of decline and recovery.

While markets have recovered from many past downturns, there's no guarantee that future recoveries will follow the same pattern.

Past performance is not a reliable indicator of future returns. The value of investments can fall as well as rise, and you could get back less than you invest.

What if I'm getting closer to retirement?

If you're approaching retirement, changes in your pension value may feel more significant.

That's because you might have less time to recover from investment losses before you need to access your savings.

For some people, gradually moving towards lower-risk investments as retirement approaches can help reduce exposure to large market movements.

This is something our default Penfold Lifetime plan is designed to do.

With Penfold Lifetime, your investment mix automatically changes as you approach your selected retirement age, gradually moving towards lower-risk investments.

This aims to reduce investment risk as you get closer to retirement, although your pension can still fall in value.

The right approach will also depend on how and when you intend to use your pension. For example, someone planning to withdraw their savings soon may have different investment needs from someone planning to keep their pension invested throughout retirement.

How is my pension value calculated?

Your pension is invested in funds, and each fund is divided into units.

When money is contributed to your pension, it's used to buy units in your chosen fund. The price of those units changes depending on the value of the underlying investments.

When unit prices rise, your pension value generally increases. When they fall, your pension value generally decreases.

Your pension value is also affected by contributions, withdrawals, transfers and fees.

How often does Penfold update my pension value?

Your Penfold pension value is updated each working day using the previous working day's closing unit price. That means changes in financial markets might not appear in your app immediately.

You can check your current pension value, view your contributions and track your investment performance in the Penfold app.

We're here to help you understand your pension

Seeing your pension value fall can be unsettling. But changes in value are a normal part of investing, and a short-term drop doesn't necessarily mean you need to change your plans.

The important thing is to understand where your money is invested, how much risk you're comfortable taking and how long you have until retirement.

With Penfold, you can easily check your pension value, track performance and see how your savings are invested, all in one place.

And if you've got questions, our friendly team is here to help you understand your pension and the investment options available.

Check your pension in the app

Remember, the value of your pension can go down as well as up, and you could get back less than you invest. If you're unsure which investment options are right for your circumstances, consider speaking to a regulated financial adviser.

This article is for general information only and isn't personal financial advice.