The impact of investment performance on your pension

15.03.2019

Over the last year, the investment markets have experienced volatility. But what does this mean for your pension savings and should action be taken?

Whether you have a Workplace Pension or are paying into a Personal Pension, you may have experienced the performance changing dramatically over the last 12 months. The value of the money stored away for your retirement may have decreased. When you look at how the value has changed, it’s natural to worry about the impact it will have on your future. However, taking a calculated, measured approach is crucial.

According to data from the Moneyfacts UK Personal Pension Trends Treasury Report, just 9% of pension funds generated a return in 2018. In the final three months of 2018, the average pension fund fell by around 7.3%, leaving them down by 6.2% over the year. As a result, the economic and political uncertainty that has marked 2018 has likely had an effect on the money you’ve saved into a pension. Investment markets are complex and influenced by a range of factors, but areas such as Brexit and a trade war between the US and China, for example, have had an impact in recent months on performance.

How does investment performance affect your pension?

Poor investment performance will clearly have had an immediate, negative effect on the value of your pension. However, when you look at the impact it will have on the income delivered in retirement it may not be as bad as feared. When you assess your pension at any point, it’s important to consider when you plan to retire.

Often, people will save into a pension for decades, with retirement a long way off when they start putting money away for it. Looking at the bigger picture highlights that historical figures show growth outpacing the losses, ultimately delivering a return. As a result, your pension should recover from the investment losses experienced in 2018 when looking further ahead.

If pension volatility has led to you consider reducing or stopping contributions, there’s another key factor to think about too. Workplace Pensions will typically benefit from employer contributions, for example, while tax relief delivers a boost to the majority of contributions as well. With this in mind, contributing to a pension is still often the best way to save for retirement, even during periods of investment volatility. If you’d like to discuss how your pension and retirement plans have been affected, please contact us.

While volatility may not have affected your retirement income if the milestone is a few years down the line, it can have a significant impact if you hope to retire before the markets recover. Withdrawing your pension now may mean you receive fewer benefits than expected as the value is lower. If this is the case, speaking with your financial adviser can help you understand the extent of the impact on your finances and steps you can take to minimise it. For instance, using other sources of income to pay for the first few years of retirement may give your pension time to recover.

How should you respond to investment volatility?

1. Don’t make rash decisions: Key to your response is not to make any quick decisions. Your pension is designed to provide you with an income throughout your retirement years, as such any reaction you choose to make should be carefully thought through. When you see your investments drop, it’s natural to want to stop contributions or change where your money is invested. However, staying the course and sticking to your long-term plan is often the best course of action.

2. Look at your long-term financial plan: As mentioned above, for most people saving into a pension, short-term volatility will have little impact on their retirement income. It’s important to keep this in mind when deciding what action, if any, you should take. Any long-term plan you created should have factored in investment markets fluctuating at points throughout saving into your pension.

3. Speak to a financial adviser: It’s natural to have concerns when you see investment values dip, speaking to your financial adviser can help put them into perspective. It can help you feel more comfortable with the investment process and the volatility that comes with it. Should action be appropriate, they are also placed to create the path that’s right for you and your long-term goals.

4. Reassess your risk profile: All investments involve some element of risk. However, if you’re not comfortable with the level of volatility your pension has been exposed to, assessing the current risk profile may be beneficial. It’s important to do this with a wider view of your finances in mind.

5. Keep an eye on performance: Typically, when you look at investment performance over the long term, you should see a general upwards trend. Keeping an eye on your performance means seeing investments gradually recovering and hopefully returning to positive territory. In some cases, you may find investments underperform in the long term, in which case making changes to your pension strategy may be appropriate.

If you have any questions about your pension and investment performance, please contact us.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on individual circumstances of the investors.

Workplace Pensions are regulated by The Pension Regulator.

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