Approaching Retirement? It might be worth checking your pension value.
After years of saving into a pension, those people approaching retirement are likely to have been regularly checking the value of their investments. Some people may have recently found that the money held in their pension has fallen and will be worried that they have lost money.
A drop in the value of your pension before retirement can be concerning, especially at a time when inflation is high and the costs of living continue to rise.
It’s important to understand why this has happened, and to work through your choices as to how to take your pension income and put this concern into context. It may also help you decide if you need to take action.
Why has my pension fund value dropped?
A pension is just a wrapper around an investment portfolio. It provides tax advantages and is governed by rules on how the money can be withdrawn.
Pension values rise and fall as the stock market goes up and down. Whether those fluctuations are large or small depends on how your money is invested.
Money held in pensions is invested according to the choices you make when take out the fund. If you opened your pension with the help of a financial adviser, then they will have carried out a fact find, and your pension will have been invested in line with the answers you gave to those questions. If you took out the pension with your employer you may have chosen a default fund, which is an investment choice designed to suit the needs of most people saving for retirement.
Saving for retirement is seen as a long-term goal. Investments can be volatile, but as the years roll by it is expected that rises in the stock market should balance out the falls, and provide good returns for a pension fund.
Money held in pensions over the last decade has generally performed well. The past couple of years have certainly been more volatile. The pandemic caused a dramatic fall in the stock market in early 2020 which went on to recover, but now war in Ukraine has created more investor uncertainty. This volatility may have led to some people’s pensions to fall in value.
Why is my pension money being held in riskier investments still?
Previously, pensions had something called a ‘lifestyling’ option. This meant that as you approached your chosen retirement age, the investment funds held in your pension may have been switched into more cautious or low-risk fund choices if you had chosen this as an option. This meant that your pension was automatically ‘derisked’ for you, so that you would not be impacted by any last-minute rises or falls in the stock market.
Having a lifestyling option attached to a pension sounds like a good idea, but it was designed in an era when most people used their pension to buy an annuity, which provides a guaranteed income for life. For those buying an annuity, you would not want the pension value fund to fall because of stock market volatility just before you wanted to turn your savings into a pension income.
However, the majority of people now choose a diﬀerent way to fund their retirement and keep their money invested. For these people, the ‘lifestyling’ route may reduce the return you could expect to get. Many pension providers believe that ‘staying invested’ is a better option for most people than de-risking.
Since the introduction of pension freedom reforms in 2015, many pension providers have moved away from lifestyling. Understanding if your pension does or does not have a lifestyling option will explain why for some a pension value may have fallen.
What can I do to better take control of my pension and retirement plans?
Having a better understanding of the pension investments you have is the first step.
It is not uncommon to hold several pension funds when you reach retirement, especially if you have had several diﬀerent jobs over your career. Each pension is likely to be invested diﬀerently and have diﬀerent charges that you are paying for. Depending on when you took out the pension, it may or may not have a lifestyling option automatically attached.
Reviewing your pensions several years before retirement is a good idea. A financial adviser can help you to review what you have and will help you to make changes if needed. They will also help you to determine if you are on track to achieve the income you expect in retirement. With so much uncertainty with the cost of living, an adviser will be able to put your pension in the context of your other assets or financial pressures to develop a plan that is personal to you.
If you are approaching retirement now, it is important to get advice before making any decisions on how to turn your pension savings into an income. Whilst it may initially seem complicated, there are a range of choices available and is important to understand all of those before you make a decision on how to use your pension fund. Which route you take can significantly impact your wealth in your later years and decisions made are not reversible, even if later down the line you realise you have made a mistake.
Our team of qualified FCA regulated financial advisers at Furnley House can help at every stage of your retirement planning. To find our more call 0116 269 6311 or email email@example.com.
Past performance is not a reliable indicator of future performance.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
All information correct at time of writing.