Why does my pension go up and down in value?

It can be worrying to see the value of your pension go down. These are your hard-earned savings, after all. But as with any investment, some fluctuation in your pension is normal, and the good news is that your pension will likely go up in value again in the long run. That means that unless you're retiring very soon, there’s a good chance your pension will be in good health by the time you need to access it. That said, even if you’re planning to retire in the near future, there are some things you can do to protect your pension from any volatility. In this article, we share why pensions can go up and down in value—and what you can do to make any falls in value less concerning.

Why your pension value goes up and down

If you have a defined contribution pension, like most people saving for retirement, your money goes into a pension fund. This is unlike a savings account that simply holds your cash and adds interest. Instead, a pension fund uses your money to invest in other assets, such as stocks and shares, that are expected to increase in value. Usually, those assets do grow in value, which is why your pension’s value usually goes up in the long term. But they can decrease at other times, such as during the COVID-19 pandemic. That means your pension’s value will decrease too, and when this happens, it can feel a little scary.

How the stock market affects your pension

Usually, a large portion of your pension fund will be invested in the stock market. When a company does well, the value of its shares increase. When it performs badly, the value of the shares will typically fall. Pension schemes don’t just invest in one company but in many. And, in a typical year, most of them will usually grow (helping your pension grow in value over the long term). But during times of political instability or economic uncertainty— such as, say, a global pandemic — lots of companies can lose value at the same time. All these fluctuations in the market are known as volatility, and it’s this that causes your pension’s value to go up and down. Unfortunately, that’s an inevitable part of investing. It’s a necessary risk if you want to see your savings grow. However, while some stock market volatility is unavoidable, the market usually grows in the long term. For example, analysis from 2009-2021 shows there were only two years (2011, 2018) when pension funds didn’t grow. In fact, look at the stock market's historical performance, and you’ll see that overall it grows at an average of about 10% each year. That’s why pension funds are often willing to risk a bit of volatility—because they trust that any drop in value will be recovered in the long term.

It’s not just the stock market that your pension is invested in

While most pension plans will invest in stocks and shares, they won’t be the only assets in which your pension is invested.

Pension funds tend to make investments with the aim of long-term growth. To achieve that—and to limit that volatility—they’ll invest your pension in a diverse range of assets:

Property: The largest pension funds often own commercial property like offices. They’ll typically profit from them through rental income and increases in property value.
Government bonds: Often, pension funds will lend money to governments by buying “bonds”. These last for a fixed length of time before the loan is returned. Bonds are known as a less risky investment because your pension will typically get a fixed interest rate for as long as they’re invested.
Cash: Investments in cash deposits are usually seen as much lower risk than other investments and can be held for any length of time. However, the returns are likely lower.

The idea behind investing in all these assets is that they’re unlikely to all perform badly at the same time. So, if the markets suffer, investments in government bonds (for example) will prevent your pension from dropping too much in value. However, while some assets are less risky than others, it doesn’t mean that they are completely risk-free. Whatever you’re investing in, you can get out less than you put in.

What can you do to survive drops in value?

Some short-term drops in value are an inevitable part of using any pension fund. That said, there are some things that you can do to protect your pension when you need it.

If you’re not retiring soon, ride out the volatility

Many investors know that feeling of seeing their investments fall in value. It’s not nice. However, panic-moving your money into a different fund likely won’t help. If you’re not retiring for the next five or ten years or more, often the best course of action is not to do anything at all. It is reasonable to expect your pension to recover from any slump all by itself.

Change your risk level (particularly if you’re nearing retirement age)

Every pension provider will offer different funds with different risk levels, which you can choose. Lower-risk funds will reduce the chance of falls in value, but they’ll also reduce how much your fund is likely to grow.

Changing to a lower-risk fund can be a good idea if you’re approaching retirement age and want to shore up your savings.

With CIRCA5000 pensions, you can build your portfolio using three risk types:

Cautious

For those seeking conservative growth and aiming to limit their exposure to the ups and downs of the market.

Balanced

For those seeking moderate growth potential and can tolerate modest ups and downs in the market.

Adventurous

For those seeking high growth and aiming to limit their exposure to the ups and downs in the market.

Make sure your investments are diverse

Typically, pension funds will make most investment decisions for you. But if you’re choosing where your pension’s invested, it’s always worth considering the diversity of your portfolio.

The funds used by CIRCA5000 have been closely considered so that they demonstrate diversification in a number of ways:

Diversification across companies: Investing in just a single company means your pension will suffer if they perform poorly. While research suggests investing in 50 companies will reduce risk, the funds used by CIRCA5000 invest in over 300 to minimise risk.
Diversity across sectors: Imagine those 300 companies were all in one industry. If that industry suffers, so does your pension. That’s why we invest your money in sectors from technology to healthcare and utilities, and much more.
Diversification across countries: The same goes for different countries. If political decisions affect a single country’s growth, your pension needn’t drop in value. Your pension at CIRCA5000 is invested in companies listed in over 40 countries.

If you want to know more, you can read about how diversified CIRCA5000 portfolios are.

Invest in businesses committed to sustainability

There’s growing evidence that investing in companies focused on sustainability and solving social challenges can help your pension in the long term:

Your investments can perform better For example, a study of the performance of investment funds over the last five years showed that sustainable funds outperformed standard funds.
Sustainable investments may be more resilient to volatility Since January 2012 until June 2022, funds investing in companies with strong environmental and social performance have experienced less volatility than standard funds.

Past performance is no guarantee of future returns.

Start investing early

Saving for a pension is a long-term effort. And the longer you invest, the more you’re likely to see in returns. Starting early can be a great strategy if you’re looking to future-proof your pension.

The reason it works is compound growth. Your investments will hopefully grow every year you save for a pension. Compounding means that your investment growth could be exponential.

Why? Your profits from previous years are reinvested back into your pension and you make a profit on your profits. Say you have £10,000 in your pension pot that receives 5% simple annual growth rate.

That would earn £5,000 in profit over 10 years. However, with annual compound growth of 5% on £10,000 over 10 years, the total you would earn would be £6,288.95, so that £10,000 becomes £16,288.95.

Now, say that £10,000 sits there for 30 years. That money wouldn't just be worth £15,000 after keeping it invested for 30 years, but £33,219.42.

The longer you leave it the greater the effect. In this way, by investing for as long as possible, you’ll increase the value of your savings simply by reinvesting your profits. And you’ll be helping your pension survive any volatility.

What this means for your CIRCA5000 pension

When you invest your pension with CIRCA5000, you can track the value of your pension whenever you want. That means that you’ll be able to see it increase in value over time, but you’ll also see when its value occasionally falls.

It can be scary to see your savings fall in value. But that volatility would affect any other pension you had in the past. The only difference now with CIRCA5000 is that you have full transparency over what’s happening with your money. We think that’s better than being in the dark about how your money’s doing.

Ultimately, we’re committed to helping your savings grow in the long term while helping your money do good at the same time.

When you invest, your capital is at risk. You should consider whether opening a CIRCA5000 pension or transferring your old pension is right for you. Please note that tax rules and reliefs may change depending on your circumstances. CIRCA5000 does not provide any financial or tax advice, and you are responsible for your own tax reliefs/payments. This article does not represent financial advice. Your investments and the income from them can go down as well as up.