My pension balance has gone down, where has the money gone?

Clare Reilly

by , Chief Engagement Officer

at PensionBee

24 Aug 2022 /  

Woman looking at map in front river.

Seeing your pension balance go down can be alarming, even if you already understand that with investments, your money moves around daily depending on what’s happening in global stock markets. When staring at your balance screen you may wonder where has my money gone? Is the loss purely from market volatility?

So, what’s going on and should you be concerned?

How does investing work?

Simply put, investing is buying assets with the aim of generating positive returns. When you invest, you’re purchasing an asset at one price with the hope that same asset will increase in value over time, and create a profit when sold. However, there are no guarantees with investments. In broad terms, owning anything from artwork to property to shares in a business can be considered an investment.

Buying a property for £165,000 in 2012, and selling it six years later for £225,000 in 2018 would be seen as a successful investment, as it produced a £60,000 profit. Whereas buying a Damien Hirst painting for £30,000 in 2008, and selling it a decade later for £20,000 in 2018 would be an unsuccessful investment, as it lost £10,000 in value.

Whilst there’s no crystal ball when it comes to investing in ‘real’ assets (such as property), there is more guidance when it comes to ‘financial’ assets (such as your pension), as we’ve got lots of historical data to point towards when considering how these may perform over time.

Although a single investment (like a painting or a property) may fail to create a profit, spreading your money across different investments may reduce your overall risk of investment failure. That’s why diversification of your investments is so important.

Diversification is a strategy of investing your money in a mix of assets. Most pension funds contain a mixture of different types of investments such as bonds, property, cash or company shares, all batched together in a plan, for easy and cost-effective investing.

How do pension investments work?

PensionBee pensions (like all pensions) are made up of units. That means when you invest, by transferring old pensions or making contributions, you buy units in your chosen pension plan. If you own 100 units in your plan and each unit is worth £1.25, then your pension balance is £125.

Once a day, on weekdays, we get an update from your money manager with the updated unit price. The unit price changes every day and reflects the performance and value of your plan on that day. The unit price is made up of the value of the underlying company shares in the plan eg. if the value of Google falls and you are invested in an index that includes Google, this impacts the unit price of the plan.

So, if the unit price drops to £1.10 and you have 100 units, your pension balance becomes £110. Remember, unit prices go up as well as down, and reflect the health of the market on any given day. The principle is, that if the value of the underlying companies you’re invested in fall, then the value of your plan falls. Where the money ‘goes’ is that your portion of that company has decreased in value and the value of the unit price goes down with it.

Is there an impact to not investing?

In 2022, a mixture of geopolitical struggles, high inflation, and supply chain issues created the perfect storm of market volatility, which impacted both company shares and bonds. Consequently, the value of your units in 2022 may have gone down. As this is a global issue, transferring to another provider won’t recover your market losses.

It’s important to remember that the value of your pension will go up again, when the markets recover. Choosing to withdraw your money when your balance is down might seem tempting, but if the unit prices improve after you’ve taken your money out, reinvesting your money into your pension would cost you more, as prices would be higher.

Also, as inflation erodes the real value of cash over time, investments like pensions still prove to be a competitive choice against the rising cost of living.

Should I do something?

Withdrawing your money won’t recover losses. Money invested may see recovering markets so, if you can, prioritise using rainy day funds before realising losses on your investments. Those are the key takeaways to navigating market volatility.

As strange as it may sound, contributing to your investments when markets are low can be cost-effective. Adding £100 when markets are down will usually buy you more units than when markets are up, when unit prices are more expensive.

Again, it’s worth remembering that it’s normal and expected for pensions to go up and down in value. And it’s expected that they’ll recover and grow further in the future. If you’re over the age of 50 and are considering your retirement options, you may benefit from a free Pension Wise appointment. You can book your appointment online.

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.

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