How should you view your pension in a downturn?
Recently, global markets have been volatile due to the impacts of coronavirus. Downturns in the stock market are almost always headline news and can leave many investors feeling unsettled. This may be even more heightened when viewing a large investment, like your pension. Although your emotions may be telling you to take action to protect your hard-earned savings, for most, the smartest decision you can do is to continue as normal. Here’s why…
You have time on your side
Pensions are usually the investment you will hold for the longest period of time. If you began saving into your pension pots at age 22, you would be in the market for 46 years by the time you reach retirement (assuming a retirement age of 68).
For those who are many years away from reaching retirement, this temporary market downturn is unlikely to harm your savings in the long-term, as your pension pot will still be in the market to see a recovery. And for those who are nearing retirement, there are unique fund options to help you invest in less risky assets as you get older (see our LifePath fund below).
Whilst they feel bad at the time, market crashes (when the stock market falls more than 20%) have happened throughout history (see graph below). While past performance is not a reliable guide to future performance, so far 100% of market crashes have been followed by a recovery that more than recovers the fall. In fact, a JP Morgan study found that 6 of the 10 best days in the market (based on the S&P 500 index) over a 20 year period occurred within 2 weeks of the 10 worst days.
If we also look back over the last 20 years (end of 1999 – end of 2019), the FTSE All-World GBP has averaged an annual return of 7.5%, and this includes the crash of 2008. While we don’t know how markets will recover this time, hanging in there means you won’t miss the opportunity to benefit from potential future growth.
Continuing to contribute has many benefits
Your pension savings can be helped in a market downturn by pound cost averaging. If you contribute to your pension on a regular basis, you benefit from the average price of the investments you buy over time. So when you continue to contribute during a downturn, you buy investments at lower prices, which could be beneficial in the long-term.
Also, all contributions into your pension are boosted by a generous tax relief government top up. Depending on your circumstances this up-front 20% (or more) boost makes saving into your pension one of the most savvy and tax-efficient investments you can make. The tax you would normally pay on income is waived if you pay this cash into your pension. If you’re a basic rate taxpayer it only costs you £80 to add £100 to your pension, or only £60 for higher rate taxpayers and £55 if you’re a top rate taxpayer. Learn more about the advantages of pension tax relief.
The Moneybox Personal Pension funds help manage the risks of investing
We have worked with trusted experts to offer you three different fund options for your Personal Pension.
The Fidelity Index World Fund diversifies your investments into more than 1,600 global companies across 23 developed countries. This diversified exposure spreads your investment risk globally, meaning you haven’t got all your eggs in one basket. The fund tracks the MSCI World Index, meaning you’ll feel similar ups and downs as the overall market’s performance.
The Old Mutual MSCI World ESG Index Fund also spreads investment risk across a range of global companies so you are not tied to the fortune of any one company. Additionally, it has the consideration of being a socially responsible fund. This fund scores global companies based on their environmental, social and governance factors, such as how companies respond to climate change, treat their workers and manage their supply chains.
Finally, the BlackRock LifePath Fund is a ‘Lifestyle’ fund unique to pension investments. This fund changes the balance of your investments as you get closer to your anticipated retirement date. If you are younger with many years until retirement, the fund will invest in higher growth assets such as shares and property. These carry a higher risk, higher potential reward strategy and may be the reason you could be seeing a large fall in your investments. However, here you have the time in the market to see a recovery and market growth once again. Plus, as you grow closer to your retirement age your investments in the fund will switch to safer assets such as bonds, lowering your risk of negative returns.
While tuning out of the short-term market fluctuations and noise of headlines may be challenging, knowing your time horizon, focusing on your long-term investing goals and continuing as you were is, for most, the best way to view your pension pot during a market downturn.
Please note Moneybox cannot accept a pension you’re currently paying into, or any old pensions that provide guaranteed benefits when you retire.