Understanding the Ups And Downs of Your Pension Pot

Imagine this: You’re sipping your morning coffee and decide to check the Penfold app for a quick pension update. But wait, what’s this? Your pension pot value has changed – and you haven’t even made any new contributions! Let’s take a look at what’s really happening with your pension.

Why Did My Pension Pot Change?

Your pension is invested, which means it isn’t just sitting around in a savings account. Every contribution you, your employer and the government (in the form of tax relief) make buys “units” in your chosen pension fund.

These units, or investments, include things like stocks, bonds, or even cash. With Penfold, the split between stocks, bonds and other assets is dynamic, which means the allocation can change depending on what's happening in global investment markets. (This gives your money an extra layer of protection.)

But investments in your pension fund can still rise and drop in value. This could be due to stock market trends, economic events or new political policies. And as a result, your pension pot could change too.

The value of your defined contribution pension comes down to three things:

• Your (and your employer's) contributions
• Added tax relief from the government
• The performance of your pension fund

What Should I Do If My Pension Value Drops?

Of course, pension pot fluctuations aren’t always positive. Things like the COVID-19 pandemic or the ongoing Russia-Ukraine war can cause temporary dips in investments. And as with all investments, your capital is at risk so pensions can go down in value as well as up and you could get back less than you invest.

But it’s important to remember that changes in your pension value are completely normal. It’s all part of the investing process.

And most of the time, it’s better to simply do… nothing. Just giving your pension pot time to recover can be the wisest move. Remember, you’re likely saving for upwards of 40 years so are looking for long-returns not quick wins. Investing is a marathon, not a sprint.

Should I Act Differently If I’m Close to Retirement?

If you’re nearing retirement, you don’t have as much time to allow your pension pot value to recover if it goes down in value. You might want to shift to a less volatile – and less likely to dip – plan, like our Standard Lifetime Plan. It automatically adjusts your investments to maximise early growth before protecting savings when approaching retirement.

See for Yourself: Investment Dip and Recovery Is a Common Trend

The chart below – the performance of our default fund, Standard Lifetime since September 2021 – show us that dip and recovery is a common trend. If you’d moved your money during the downs, you would’ve missed the ups.

This information should not be regarded as financial advice and past performance is not a reliable indicator of future returns.

How Much Could I End up with in My Pot?

Because future investment returns are uncertain, we use three scenarios of projected growth; low (2%), mid (5%) and high (8%) – with an assumed price inflation of 2%.

Using a 2% average, a monthly contribution of £250 over 40 years could see your pension grow to nearly £183,915, thanks to the magic of compounding. A 5% average in the same scenario could see you save £383,095. And a high level of returns at 8% could grow to £878,570.

At Penfold, our most popular plan – our default fund, Standard Lifetime – has seen an average yearly growth of 6.48% from inception to March 2024.

While it’s important to acknowledge the risks, it’s equally crucial to recognise the potential for long-term growth. Diversified investing over the long term has an incredibly low chance of diminishing your initial investment. In the world of pensions, time is your ally.

Our Tips: Stay Calm. Resist Urgent Changes. Stay Informed.

Your journey to retirement is filled with ups and downs – and we’re not just talking about your pension pot. But remember, investing can be a rewarding path.

As a reminder, here’s a simple checklist to follow if your pension pot value dips:

• Stay calm: Remember, pension investments are a long-term game
• Resist urgent changes: Avoid making hasty decisions like withdrawing your money
• Stay informed: Understand what's happening in the markets and keep an eye on your Penfold app

We're always here to help

At Penfold, we’re here to guide you through these fluctuations, ensuring you’re well informed and ready for whatever the financial weather brings.

With our app, you can view your pension performance at any time. Though we don’t recommend constantly checking up – it is, after all, a long-term investment.

And for personalised help or more information, feel free to contact us or explore our other news and insights. We’re here to help you navigate through.