When markets are volatile, it can be tempting to want to take action. However, trying to time the market could have negative long-term consequences for your pension. Knowing how long it takes to switch pension plans, and what affects balance fluctuations during volatile markets, can help you make a more informed choice.
Please note that all figures and data presented in this blog are theoretical for educational purposes and they should not be considered financial advice. PensionBee is not liable for any personal investment decisions made based on this content.
Switching plans during market uncertainty affects your pension balance
Pension funds are made up of units, and when you contribute to the fund, you’re essentially buying more units at the next available Net Asset Value (‘NAV’) per unit. This price reflects the value of the fund’s underlying assets and is calculated daily. As a result, the NAV fluctuates in response to changes in market conditions.
During volatile periods, your pension’s daily value can fluctuate significantly. Before you decide to switch plans, it’s important to understand how this may affect your pension balance in the long term.
1. Daily price swings affect your pension value and sale price
Daily market swings can cause the NAV to rise or fall sharply. If your plan switch happens during a market dip, the price used to sell your units might reflect a temporary low. This means you could sell your units at a lower price, also known as selling at a loss.
Imagine you have a pension fund with 1,000 units, and you want to switch plans. To do this, you need to sell your current units before purchasing new ones in the new fund. However, the total selling price will vary depending on the day you sell the units because the NAV changes daily.
For example, on 10 June, the NAV was £1, so you’d receive a total of £1,000 when you sell your units. On 11 June, the NAV increased to £1.50, meaning you’d receive £1,500 for the same 1,000 units.
This highlights the importance of the selling price when making your plan switch. The NAV difference will tend to be greater during volatile times due to larger daily price fluctuations.
2. Being out of the market during a switch impacts long-term investment goals
The switching process can take around 12 working days to complete, on average. During this transition, your funds will be temporarily out of the market, meaning they’re not invested in any assets, but held in cash. While this may seem like a brief period, in times of uncertainty, this can be a critical factor in your long-term investment objective.
This is ‘out of market risk’. Being out of the market can have a compounding impact on your pension balance because pension investments rely on consistent market exposure to grow over time. But when you’re out of the market, you may miss the potential growth opportunity, especially if the market moves sharply upwards thereafter.
The risk is further compounded by attempts to time the market. Understanding why trying to predict market movements may lead to missed opportunities is key to protecting your balance during volatile times.
Timing the market is impossible: The worst trading days are often followed by the best
You might wonder, when is the best time to switch plans during market uncertainty?
The simple answer: trying to time the market can backfire, as it could lead you to missing strong market rebounds that often follow downturns.
Historically, the best and worst trading days in stock markets tend to occur close together, especially during volatile periods.
The graph above shows the daily closing prices of the S&P 500 Total Return Index (the largest US stock index) from 2004-2023. Over the past 20 years, six of the seven best trading days followed the worst days. Seven of the 10 best days occurred within two weeks of the 10 worst days during that period.
The cost of missing the market’s best days for pension investors
Pensions are a long-term investment, spanning from five to over 50 years. To achieve consistent growth, staying fully invested throughout your working life is key. Staying in the market means you’re more likely to benefit from rebounds and long-term upward trends. Both of which significantly influence overall returns. On the other hand, switching when the market is volatile could mean missing out on the market’s best days, leading to a substantial reduction in long-term gains.
The above bar chart shows the impact of missing the best trading days in the S&P 500 over the past 20 years on the growth of a £10,000 original investment.
An investor who remained fully invested during this period would have earned £75,007 with an annual compound return of 10.60%. However:
- missing the 10 best trading days would’ve reduced that return by c.54%;
- missing the 20 best days would’ve reduced it by c.73%; and
- missing the 30 best days would’ve reduced it by c.82%.
This highlights the risk of attempting to time the market during times of volatility and, therefore, missing out on rebound opportunities. Even missing out on a few top days can drastically reduce long-term returns.
Data source: J.P. Morgan Asset Management, as of 28/02/2025. Based on S&P 500 Total Return Index (incl. dividends). Please note that an individual can’t invest in an index directly, and past performance does not guarantee future returns. Capital is at risk.
Pensions are long-term investments, and market volatility is a normal part of investing. While it can feel unsettling, historical trends suggest markets often balance out over time.
The most important takeaway is staying invested. Attempting to time the market by switching plans during volatile periods risks missing crucial rebound opportunities, which can drastically reduce your long-term returns. Being out of the market means you may miss potential growth.
To navigate this, regular contributions and starting early give investments more time to recover. Understanding volatility and focusing on your long-term investment strategy can help protect your pension.
Have a question? Get in touch!
Do you want to know more about your pension plan with PensionBee? Learn more about the top 10 holdings in your pension fund on our blog, which is regularly updated. You can also look at our Plans page to learn how your money is invested in different assets and locations, or log in to your BeeHive to see your specific plan. You can always send comments and questions to our team via engagement@pensionbee.com.
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.
