Your pension should be seen as a long term investment product, but unfortunately it will go up and down on a daily basis. This is because it’s invested in the stock market, bonds, gilts etc. rather than sitting in a simple cash account.
By taking such actions by your pension provider, the aim is to produce long term investment returns year on year that beat inflation.
With the aim of when you do reach retirement, the pot value will be a lot higher than the amount of contributions that you have contributed to over the many years, whilst saving in that particular product.
It will go up and down on a daily basis due to economic events within a specific country or globally. Politicial events or market sentiment, which is completely normal as markets change and evolve over time. What may be topical or relevant now, may not have been so some years ago.
So why does the market go up and down !
Investment returns: (Volatility) – As you invest into your pension, your pension provider or administrator will buy units within a fund. As the market performs well, the value of these funds increase so your portfolio value increases. If the markets dips due to sentiment or economic uncertainty or bad news the price falls, hence the reason the portfolio will lose value.
Think of your pension as long term !
For most people their pension whether it be workplace or private, is probably their 2nd biggest asset after their home that they live in. It could be that you start investing into a pension in your early 20’s, but you don’t access until your 50’s or early 60’s when you come to retire. so learn to avoid short term market dips – stay invested and think long term.
As any seasoned or long term investor tells you the markets will have good years and bad years, but will always recover over the long term time horizon.
What about interets rates & Inflation !
If interest rates are high or the rate of inflation is high over numerous years, it could have an adverse effect on your investments. They could struggle to keep up with inflation and become eroded over many years. Higher rates usually depress bond values, which could be seen as safe and conservative within a portfolio.
What to do during a market downturn !
Firstly don’t panic, the worst thing anyone can do is to sell investments at a loss. Once a loss is encountered it is permanent and cannot be reversed.
It could be seen as a great buying opportunity – as you will be buying more assets each monthly contribution at a lower price, which should rebound and grow over time
Review your attitude to risk – most people have no idea where their funds are invested. They just see a total figure, but could you change funds or investments based upon your attitude to risk. Is your attitude to risk now the same as many years ago when you started investing in a pension.
You are not alone !
The vast majority of people, I speak to on a daily basis upon accessing a DC pension, have no idea where their money is invested. They just see a headline figure and total sum invested. They don’t know if it’s a lifestyle or default fund. if it goes up then great, if it goes down so not so great – but to most people it’s complete inertia.
So learn to get involved in your pension plan, nobody should care more about it than YOU !
A simple illustration: When I worked for a previous employer they closed down their final salary (DB) pension and replaced it with a new DC pension. Which wasn’t guaranteed and then went up and down in value on a daily basis. With roughly 1,500 people on the payroll, they virtually all went into the default fund based on age and risk profile. Only 3 people actually picked their own funds, and they were the Trustees of the old DB pension (myself included). Speaking to other employees and work colleagues they weren’t aware they could pick their own investments and they had no idea or clue who to pick their own funds. As the idea of investing was completely alien or confusing to them, it was outside their comfort zone.
So remember knowledge is power – it could be your greatest investing asset.
Some key considerations !
Isn’t the world of investing dangerous – it may well be but investments into funds, companies, asset classes should always outperform cash over the long term. Although in recent times we have seen the COVID pandemic, Russia / Ukraine conflict, Tech bubble in 2000 and banking crisis in 2008. The market over the past 50 years has returned nearly 9% year on year.
Learn to diversify – Your pension provider will invest your contributions into funds holding shares across number sectors, countries and asset classes. By doing so, it should reduce or try and eliminate risk access numerous different locations. In some years, shares may perform better then bonds or gilts, or commodities and vice versa, but it should level out across the years towards attaining successful and positive market returns.
What about Lifestyling funds !
A lifestyle or default fund, has the aim to invest in shares dependant upon your age or attitude to risk. With the aim to reduce risk and protect your investments as you get older and nearer to your selected retirement date. When you join a scheme, your provider will normally select a normal retirement date of say 60 or 65. Although you can access from age 55 through the minimum pensions age (MPA), but this will increase to age 57 from April 2028.
In the earlier and younger years, your money may be invested in more riskier assets, such as stocks and shares to produce greater investments returns.
As you become older the fund will be moved into less riskier assets such as corporate bonds or gilts, protected by a company or the government. Gilts are perceived to be the safest asset around as the government never defaults against them.
So firstly, you need to check the selected retirement date attached to this scheme, it may be 55, 60, 65 or anytime up to age 75.
Could I choose my own Ethical Investments ?
This is becoming more popular as people realise their pension money has the opportunity to do good. Many people would prefer to see their money helping to fund schools, hospitals, public transport and renewable energy rather than fossil fuels, tobacco, weapons and defence products.
Pension schemes can now make investment decisions based on environmental, social and governance (ESG) factors. These look at environmental and social impact and also how companies are managed (governance) – even how they treat their employees.
So how do I find where my funds are invested ?
The simplest and easiest way is to check your annual benefit statement in paper format. Or you could log into your online account or portal.
It should provide details of fees and charges, selected retirement date, level of monthly or annual contributions plus tax relief added. Along with which funds your contributions are invested in, such as life styling, default, global etc. If you have an older scheme, it may be in managed funds or with-profits. It should also state how much profit and loss it has made within the past 12 months.
If you are checking the details on your private or workplace pension, it may be worthwhile to check and complete nomination or beneficiary forms. As the money in your pension pot could pass onto your spouse / children or wider family members such as siblings, grandchildren.
If you die below age 75, it will remain tax-free as long as they claim within 2 years.
If somebody dies over age 75, they could receive the money left in the pot, but they will have to pay income tax at their marginal rate.
Can I pick my own investments ?
Most pension schemes offer the chance to choose your own investments if you feel
comfortable doing this. Here are the basic points to remember when you’re choosing
investments.
* Higher risk of going up and down in value = should provide more growth over the long term
* Lower risk of going up and down in value = will give more protection in the short term
If you are going to pick your own investment funds, you may consider investing or setting up a self-invested personal plan (SIPP). It will give you a greater choice of investment shares, funds or assets to invest in. It could include individual companies, commercial property gold etc.
A SIPP could be set up quite simply online in a matter of minutes in a hassle free way.
You could use the following companies:
Although other companies are available, so do your research and background checks.
What should I do if I want to retire in the next year?
If you’re planning on retiring in the next 12 months, you may want to give greater importance into checking how your funds are invested. If you don’t need the money and your pensions aren’t invested in lifestyling or target date funds you could potentially wait for the markets to recover. You could use other savings, assets in the short term to bridge an income gap.
An option, could be giving consideration to switching funds to make them work better for you. You should ideally speak to your respective pension provider about the process to switch and any costs associated, plus expected timeframe to implement.
If you find that you are invested in a lifestyle fund, but you are planning to access our pension flexibly, don’t worry, it’s never too late to change your investments.
You can change your target retirement age with your pension provider, usually up to age 75.
What if my pension is defined benefit (DB) !
If you are part of a Denned Benefit (DB) scheme, you do not have to worry as much about the markets as it’s the responsibility of the trustees running that scheme to ensure there’s enough funds to pay the benefits promised. It’s important to remember that any income or pension should be guaranteed, based upon length of service, accrual rate and final salary being paid to the member.
In a worse case scenario, if you do find yourself in the situation where your scheme is unable to pay the promised benefits, the Pension Protection Fund (PPE) or Financial Assistance Scheme (FAS), will step in to pay respective benefits to the member.
Remember, It’s important not to panic and if you need help seek proper and regulated advice before making any changes to your pension as you could make an expensive mistake.
You could take advantage of free and impartial guidance service on the money helper website called PensionWise. They won’t recommend any products or specific advice about investments, but they provide free and impartial guidance on transfers, and the options available to you. When accessing a DC pension from age 55. The call will last around 1 hour and it’s free and impartial.
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise or call 0800 138 3944 to book an appointment. They do have a helpline to any pension queries being 0800 011 3797.
Remember: If you found this blog post useful and informative, please feel free to check out my other posts on pensions, saving and investing. Plus investment books that I recommend on https:moneyminted.co.uk so you too can improve your investing and financial knowledge.
The world of personal finance and investing should be seen as safe and boring and considered long term. But you can achieve wealth and financial freedom if you think long term and invest within tax-free wrappers.
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