Even though market volatility is part and parcel of investing, losing money on pensions is never an easy pill to swallow.
But with building your pension usually a process spanning decades (55 being the earliest age you can access it, rising to 57 in 2028), it’s a feeling most of us will have to face at some point or other.
Thankfully, we’re here to help, with some simple steps you could consider taking to deal with it in a more rational, less emotional way.
Before exploring them, however, it’s important to ask yourself: “Why is my pension losing money in the first place?”
Looking for something specific? Jump to a section using the links below.
- Why is my pension losing money?
- How are pensions invested?
- What should I do if my pension is losing money?
- Investing close to retirement
- Transferring a pension
- Conclusion
Why is my pension losing money?
In the same way you wouldn’t try and fix a car problem without knowing the root cause, you shouldn’t try and patch up your pension in a panic when it’s losing money.
Granted, that’s easier said than done.
But when you understand the reason(s) behind a loss, you’ll also understand whether it’s something you can sort yourself — or something that’s out of your control and, ultimately, only time can mend.
As with all investment products, one of the most common reasons why your pension might be losing money is market volatility and economic downturns.
Market volatility and economic downturns
Whether it's political unrest, a global pandemic, or war; there are so many different external factors that can cause a slump in the market. When this does happen, it's crucial to remember they're just that: external factors which, more often than not, are out of your control anyway.
Currency fluctuations
You might not think global currencies affect your pension, but as an inseparable part of markets, the opposite is true. Let’s say part of your pension is invested in Japanese stocks; if the Japanese yen drops in value, so will your investments — and, in turn, your retirement pot.
Misaligned risk level
As a rule of thumb, the closer you are to retirement age, the less risk you want for your pension [1]. In your 20s, for example, you might be more comfortable with higher-risk investments, as you’ll have decades to ride out market downturns. Taking the same approach nearer to retirement, however, could lead to uncomfortable drops in your pension’s value, meaning it’s crucial to align its risk level with your life stage.
Short and long-term losses: understanding the difference
Short-term losses in your pension’s value are usually caused by market volatility. Seeing as you can’t access the money until you’re 55 (rising to 57 in 2028), those losses don’t actually become ‘real’ until you withdraw. With that in mind, whether you’re 21 or 51, your pension has the potential benefit of time to recoup those short-term hits — ensuring they don’t become long-term ones.
How are pensions invested?
At Wealthify, we know pensions can be confusing — which is why our Investment Team manage the process for you. With a Wealthify Personal Pension, you can expect your money to be invested in a smart, simple, transparent manner.
With no previous investing experience needed, getting started is just a matter of choosing your initial investment amount and style (from Cautious to Adventurous; Original or Ethical).
From there, we put your pension contributions to work using mostly low-cost funds, such as mutual funds; this is when a pool of money from multiple investors is used to buy assets.
These let your money track a market index like the FTSE 100 in the UK, and many others around the world.
What should I do if my pension is losing money?
The most important thing to try and do when this happens is not panic.
More specifically, remind yourself that if there’s a dip, there’s a reason. And once you’ve established the reason, there’s probably a solution.
Avoid knee-jerk reactions
As we’ve already mentioned, investing your pension is a long-term game — one that’s best played without any emotionally-driven, knee-jerk reactions. When faced with losses, always start by taking a step back; look at the wider context and bigger picture before making any decisions about changing your pension.
Check the news
Ideally, you want to avoid your long-term investment strategy being derailed by noisy headlines. However, if your pension has lost money, it’s always worth having a quick check to see if financial markets are being affected by global events. Essentially, the effect they have on your pension’s value isn’t something you can control, meaning you might want to stay patient and ride things out.
Review your pension plan
Even if you’ve done both of the above, you might just want to review your pension plan, regardless. Think of it as a mini–MOT or spring clean for your pension, where you check things like:
Performance: How is your pension performing against industry benchmarks? Do you think it could be enjoying better performance with another provider? Or are you ready to start taking more risk in exchange for potentially higher returns? These are all valid questions to ask yourself when it comes to performance.
Diversification: Let’s say your pension is heavily reliant on US tech stocks. If those US tech companies perform badly and your pension’s value drops, you might not have adequate protection elsewhere to balance out those losses. So, it’s crucial to check that your pension is diversified, with a healthy balance of different investment types, industries, and regions. This is especially true if you’re managing your own investments, as opposed to a company like Wealthify doing it on your behalf.
Fees: If you’re unhappy with the fees you’re paying, you might be able to minimise those ‘losses’ by transferring your pension to a more competitive provider. Your old provider may charge exit or transfer fees, however, so you may want to check this with them before you go ahead.
Lifecycle: Remember we mentioned earlier about making sure the risk level of your pension is appropriate to how long you have left to retire? Well, the strategy of maximising growth when you’re younger – but protecting that same money 10 years before you retire – is known as your pension’s lifecycle. Regardless of your chosen retirement age, having an appropriate lifecycle in place could help avoid any unnecessary losses.
Investing close to retirement
As well as making sure your pension’s lifecycle is on track, you might also want to use the years leading up to retirement to track down any lost or old pensions you have floating about. Going one step further, you might even want to transfer those forgotten pensions into your main retirement fund.
A process known as consolidation, having all your pensions in one place helps them grow together and, ultimately, makes things easier to manage. It’s important to understand, however, that combining one or more pensions doesn’t guarantee more returns.
Also, if you’re nearing retirement and feel your pot still has more growth in it, you can always delay your pension withdrawal age — leaving it invested a little longer. After all, time in the markets – not timing the markets – is what’s important.
Transferring a pension
If, for whatever reason, your pension is losing money, you’ve done your research, and still want to transfer it, you’ll first need to do your homework on choosing a new provider.
From past performance to future fees, customer care to clear communication; know exactly what you’re looking for in a new provider, using any reviews to make sure they align with those needs.
Although the process might vary from provider to provider, here’s how it works if you wanted to transfer your pension(s) to Wealthify.
- Start by using our Pension Plan creator to choose one of five investment styles (from Adventurous to Cautious), before using our Pension Calculator to see how much your pension could be worth.
- You'll then need to answer a few questions in our Suitability Quiz. This helps us assess your attitude to money, and whether investing is right for you.
- At this point, you'll be asked to provide your existing provider's name, account reference number, and the approximate value of your pension. If you're looking to consolidate multiple pensions, it's worth noting you can add as many as you want.
- From there, it's just a matter of authorising your pension transfer. This allows us to contact your existing provider and transfer your pension's current cash value — ready to invest it into your new Wealthify Pension Plan!
- With Wealthify, the transfer process usually takes 2-6 weeks, with our Customer Care Team on-hand to support you with any questions you may have.
You can find out more by heading to our pension transfer page.
Conclusion
As we said at the start of this blog, nobody likes losing money.
And, even though seeing your pension take a hit is never going to be an enjoyable experience, we’re hoping it will at least be an easier one, having read this piece.
To recap:
- Try not to panic, reminding yourself that short-term losses are a normal part of long-term investing.
- Avoid any knee-jerk reactions or decisions.
- Instead, take time to understand why your pension has lost money.
- Once you’ve determined the reason(s), decide whether there’s something you can do about it — or if it’s best left to time to fix.
- If you’ve done all the above and still feel uncertain, it might be worth speaking to a financial advisor.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
