Headlines about high inflation and recession can leave you wondering about your pension. In this article, we explain how changes in the markets can influence your pension savings. We also touch on our investment strategy, and how it’s designed to protect and grow your pension pot.
Why does my pension go up and down, and why is that normal?
Your pension savings are a long-term investment, and like any investment, it can go up and down. If you start saving in your 20s, you are investing your savings for over 40 years. That’s a long time, so it is reasonable to experience bumpy periods, as well as periods of growth.
Here’s an example. You may remember the Global Financial Crisis of 2008 which saw a notable dip in the markets. During that time, the price of S&P 500, a major US stock market index that tracks the top 500 companies in the US, also fell. Despite its fall in 2008, the S&P 500 has grown nearly three times in value (at the time of writing). This is a reassuring sign that markets recover and can even perform better in the long run.
Now you might wonder, why is this relevant? Well, investing in and staying invested in the down periods can be beneficial. If you had invested or stayed invested in the S&P 500 at the time, your investment would’ve grown in value. This is because you are buying into investments when prices are cheap, giving you more potential upside in the future.
This is the same for your pension. Picture this – you contribute £100 each month to your pension. This £100 is invested into a fund, in other words, you’re buying units of a fund. If a single unit cost £2 to buy today, your £100 would buy you 50 units of the fund. If markets fall and the unit cost drops to £1.82, your £100 savings could buy 60 units. This means you are buying more when the price is low and less when the price is high. As the markets rise, unit prices will go up and you will be holding more units at the higher value. This works out better than buying the same number of units each month, which is how your pension is invested.
So, what’s happening to my pension in 2022?
NOW: Pensions invest your pension savings with the aim of growing the value of your pot over the long term. This factors in rising cost of living and inflation. We achieve this by choosing a range of investments that are expected to grow in value over the years. This helps you get the best possible retirement.
If you’re not nearing retirement, your pension is invested in our Diversified Growth Fund (DGF). The DGF is made up of a range of investments that covers five different investment areas. These are: equities, (interest) rates, inflation, income and other investments. These areas are chosen because they perform differently in different economic conditions.
As markets have fallen in 2022, the DGF has also experienced some ups and downs in pricing. These price changes are within our expectations for the fund. Despite the changes, the fund can still deliver good returns in line with our long-term goals. This is thanks to the range of markets that we’re invested in. But we may still see big swings as the economy reacts to the current cost of living crisis and high inflation in the short term.
I am close to retirement and need to take my pension out
As you get close to retirement, most of your pension savings are gradually switched from the DGF to the Retirement Countdown Fund (RCF), aimed at protecting your pension savings value before they’re turned into retirement benefits. We call this ‘lifestyling’, and it keeps your pension savings safe from market changes.
When and how to take your pension are big decisions. Think about when you are likely to want to take your benefits from the scheme and let us know. Our lifestyling activity is based on your planned retirement age, which is automatically set at the state pension age. You can change your planned retirement age by letting us know when you might want to retire. This will ensure that your pension savings are gradually moved to less risky investments in the run-up to your retirement.
What else can I do if I’m close to retirement?
We also suggest you take independent financial advice to help you choose your retirement options. The government service Pension Wise is a good place to start. It offers free and impartial information and guidance to people approaching retirement.
So while you might notice your pension pot going up and down in a short period, don’t worry. We’ve built our investment growth strategy with all market conditions in mind.
NOW: Pensions, our board of trustees, and our investment manager Cardano Risk Management Limited (Cardano) continues to keep a close eye on how investments are performing. They are also committed to taking the necessary steps to help you get the best possible retirement savings.