With any investment you make there will always be fluctuations in its value, and this is no different with a pension. Whenever there are periods of political or economic uncertainty, it can be unsettling to see your pension balance decrease. After all, these are your hard-earned savings that you’re relying on to be able to live comfortably in retirement. Read on to learn why short-term fluctuations occur, and find out why they are in fact quite normal and no cause for alarm.
How the stock market affects your pension
Defined contribution pensions are the most popular type of pension. When you contribute to these, your contributions will be paid into a fund that invests in the stock market. This will usually achieve growth over the long-term, but there are never any guarantees. In the short-to-mid-term its value is likely to swing both up and down.
Stock market trends
Since 2010, the average annual pension fund returns have been around 8.5%. This is often referred to as a bull market, when there’s been extended periods of growth in the markets. However the 2020 decline caused by the coronavirus pandemic has seen the second-biggest stock market crash of all time. These impacts have been felt around the world, in the UK and have been reflected in the FTSE share prices too.
Other stock market slumps, known as bear markets, have often led to considerable returns in the following years. It’s these trends, no matter how dramatic, that are part and parcel of investing. After the global financial crisis in 2008, the S&P 500 (a US stock market index that measures the stocks of 500 large-cap US companies), finished up over 20% the following year. This example from the S&P 500 goes to show how much the market can recover.
While no one can predict how long market declines will last, or say with certainty what the future will bring, history shows us that any turmoil is usually a short-term blip, and brighter news isn’t far away. That said, past performance is not indicative of future performance and shouldn’t be the basis of future investment decisions.
There’s no reason to panic
When looking at a pension’s value, it’s important to evaluate what you’ve earned or lost over its lifetime, rather than over a shorter period. If you look at your pension balance during a downturn, for example, and only focus on recent performance, declines will appear more pronounced than if you were to look at them in the context of a longer time period.
It’s possible to turn a decline to your advantage: when markets aren’t doing so well, some investors argue it’s a good opportunity to save more into your pension. Contributing during a downturn will mean you’re buying pension units (your investments) at a cheaper price. So when markets rebound, you could reap the rewards as their value increases.
Most pensions will be diversified across a range of locations and different asset classes. This means your retirement savings could be invested in shares, bonds, cash and other assets, across the globe, depending on the plan you’ve chosen. Choosing a diversified fund means that any declines in your pension will be less pronounced as you still have the opportunity to profit in markets that are doing well over the long-term.
Appetite for risk dependent on age
As a pension is a long-term investment, it’s important to consider your approach to risk and return as you get older. If you’re opting for a plan with higher potential for growth, this will come with a greater level of risk. Higher-risk investments will see sharper increases and decreases in their value. Choosing a lower-risk investment will see smaller fluctuations, but they’re likely to provide a slower rate of growth. So whilst in your 20s, 30s and 40s, you may choose to invest in a higher-risk plan, and then adopt a lower-risk strategy in the run-up to your retirement. It’s important to remember that any investment carries the risk that you may get less back than you started with.
As you approach retirement, your pension may automatically be moved to a lower-risk plan and invested into assets considered to carry lower risk, such as bonds. For example, the PensionBee Tailored Plan, derisks investments as a saver grows older, helping to protect against market tremors.
How to protect your pension
With pensions, intermittent ups and downs don’t usually have a lasting impact as most savers will have plenty of time to ride out these bumps, and benefit from the long-term growth of their investment. But for those closer to retirement, stock market crashes mean your pension has less time to recover from these losses. This is why it’s important to take a balanced approach to protect your savings.
Investing in government bonds is one way you can help protect your pension savings. Government bonds are considered to be one of the lowest-risk types of investment, however this means the opportunity for high returns is also lower. Investing in government bonds means you’re effectively lending money to different companies when they’re looking to raise funds. You’ll receive a regular fixed sum until the bond reaches its maturity date, at which point you’ll get your original investment back.
The PensionBee 4Plus Plan invests in bonds, and aims to achieve an annualised 4% return over a five-year period, making it a suitable option for those nearing retirement.
Investing in property
Investing in property is another alternative as part of a balanced investment strategy. Although some pension funds will invest in property as part of their diversified portfolio, investing directly into property offers a tangible asset that tends to increase in value over time. However, property will require more investment up front, so it won’t be possible for everyone.
Planning ahead and having a balanced investment strategy can help to reduce the impact market declines will have on your retirement savings.
What this means for your PensionBee pension
If you’re a new customer you may not be used to seeing any fluctuations to your pension balance – highs or lows. It’s important to remember that you’ll only see these dips during a downturn because PensionBee gives you full transparency over your investments and your old pensions would have experienced falls too, you just never saw them. At PensionBee, we believe it’s better to be honest about what’s happening with your money all the time and not just once a year on an annual statement.
Whilst there’s no perfect antidote to totally protect your savings from market tremors, it’s essential to keep a level head. Many of the PensionBee plans are diversified across different asset classes and locations, as we believe this is the most-balanced approach. Check out our plans page for a more detailed breakdown of how our customer’s money is invested, or if you’re already a customer, head to the account section of the BeeHive.
Risk warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.