Just like every other type of investment, pensions tend to fluctuate in value over time, especially during political or economic uncertainty such as the current coronavirus pandemic.
This can result in a great deal of stress and anxiety, because not only did you work hard to save for your pension, it’s what you’ll be relying on to live comfortably in retirement.
So what are some of the main reasons why your pension goes up and down? And how can you put your mind at ease about both short- and long-term fluctuations?
How the stock market affects your pension
Whenever you put money into a defined contribution pension, which is the most popular in the UK, this will be paid into a fund that invests in the stock market. Although this typically achieves growth in the long-term, its value could go up and down in the short-to-mid-term.
Looking back over the past ten years, the average annual pension fund returns have been around 8.5 per cent. An extended period of growth like this is known as a bull market.
However, the coronavirus has caused the second-biggest stock market crash of all time, causing FTSE share prices to plummet. This is called a bear market.
In the aftermath of a bear market, investors have often witnessed considerable returns. For example, after the global financial crisis in 2008, the S&P 500 finished up over 20 per cent the following year.
While it is impossible to predict how long today’s bear market will last, history suggests that brighter news and better performance should follow. Even so, past performance is not indicative of future performance and shouldn’t be the basis of future investment decisions.
Why there’s no reason to panic
Instead of looking at the short-term, consider what your pension has earned or lost over its lifetime for a more accurate assessment of your savings. By only looking at recent performance or during a downturn, any declines will only appear more pronounced.
What’s more, you could use this opportunity to increase your savings, as contributing during a downturn will mean you’re able to buy pension units (your investments) at a cheaper price.
If you’re still concerned about the health of your pension, here’s some ways to recover losses and protect it for the future:
- Diversify your portfolio – This means having your savings invested in shares, bonds, cash and other assets across the globe, which will make declines less pronounced.
- Look into government bonds – Considered to be one of the lowest-risk types of investment, government bonds effectively mean you’re lending money to different companies when they’re looking to raise funds.
- Invest in property – Although some pension funds will do this anyway as part of a diversified portfolio, investing directly into property offers a tangible asset that tends to increase in value over time.
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.