🎓 Pensions Academy Lesson 4

Have you ever noticed the value of your pension go down and up over time? This is because unlike a savings account that holds cash and pays a regular interest rate, the money you contribute into your pension is invested in the stock market.

Here’s what you need to know about why your pension goes up and down in value, as well as how you can best protect and grow your nest egg.


How does the stock market affect your pension? 📈

When you contribute into your workplace pension or personal pension, you’re making an investment into the stock market. In some years you might see your pension investments performing well and you’ll notice a nice increase in value. At other times, the amount may take a tumble. These fluctuations are completely normal and as with all investing, there are many factors – like company announcements, political and economical – that can have an impact on the value of your pension investments.

Your pension contributions are usually pooled into big collective investment funds with other people’s money. These may be the same as funds available for regular investments – like those you’d find in a Stocks & Shares ISA – or they could be specific for pensions and hold only retirement savings. 💰 These funds then invest in assets (think of an asset as something that can be converted to cash at a later time) that are expected to increase in value over time. They can invest in stock markets through buying and selling company shares (also called equities and stocks), or they could invest in other asset classes like bonds, property and gold.

Research shows that the market value of pension funds reached £2.2 trillion at the end of 2019. Due to their size, pension funds end up having a large stake in the economy and can use their power as major shareholders to make sure companies are well-run, sustainable and profitable.

As with all investing, these funds target long-term growth, however in the short-term you may experience a bumpy ride and see the value of your pension bounce up and down. This is known as volatility and nearly every investor goes through it.


Average annual pension fund returns

While funds can change value every day, investors do often see a positive return each year. For example, data from Moneyfacts shows that the average annual return from a pension fund was 4.9% in 2020, despite the stock market turmoil, and 14.4% in 2019. Over the past decade, only two years have shown a loss: 2011 and 2018.


Pensions are for the long-term 🌅

Even if it feels uncomfortable or stressful at the time of a market downturn – for example seeing your retirement pot fall in value during Covid-19 – your pension should be able to ride out short-term market movement thanks to its time in the market.

Remember, you aren’t drawing on your pension until you’re aged at least 55 (increasing to 57 in 2028) so this could be the longest relationship with money you ever have! If you start contributing to your pension in your 20s, you could be paying into it for the next 40 years, and if you opt to take cash out of your pot gradually at retirement, you’ll continue to hold your pension pot for many more years.

So, if your pension has decades to grow, it will likely have time to recover from market dips or crashes i.e. when the stock market falls more than 20% like the 2008 global financial crash and more recently, the Covid-19 pandemic.


How to protect your pension with different strategies 🛡️

As well as being a long-term companion, your pension can become one of your biggest assets. So, it’s important you know what you’re investing in, and how to protect your pension to minimise volatility.


Have a diversified pension portfolio

Having a well-diversified portfolio is a good place to start. This means making sure your money is spread across different asset classes and funds which invest in different markets. It’s probably not a good idea to just invest in one specific geographical location or your favourite technology company because then you’re putting all your eggs in one basket. A global and wider approach can help to diversify and protect your pension by spreading the risk. For example, if there was a downturn in, say, the US stock market, it may not hurt your pension pot value as much because you will have money spread across other markets as well. 🌍

The Moneybox Pension offers a range of diversified funds that you can choose to invest in – from the Fidelity Index World, which invests in more than 1,600 global companies across 23 developed countries, to the Old Mutual World ESG Index that scores and invests in the top global companies based on their environmental, social and governance (ESG) factors, such as climate change. You can also choose to follow the principles of Islamic finance by investing in a Shariah-approved fund – the HSBC Islamic Global Equity Index – which excludes industries such as alcohol and tobacco.


Consider your risk appetite as you get older

It’s also important to consider your risk appetite as you get older. While you may have been happy to take more risk with your investments in your 20s and 30s, given you had many years in the market before you reach retirement, you may be feeling more cautious as you get older and want to secure your nest egg. With a Moneybox Pension, you can choose to invest in the BlackRock LifePath Funds, which automatically change the balance of your investments as you get closer to your anticipated retirement date. So without lifting a finger you can manage your risk by moving from higher growth assets such as shares and property, to safer investments such as bonds as you get older.


🎓 Ready to move onto Lesson 5? We’re breaking down the jargon around pension tax relief and showing you how paying into a workplace or private pension earns you free top ups from the government!



Payments you make into your pension won’t be accessible until the minimum pension age (currently 55, increasing to 57 in 2028). Moneybox does not currently offer drawdown products for our Personal Pension). If you’re not sure whether the Moneybox Pension is right for you, a suitably qualified financial adviser can help you decide. Moneybox Personal Pension T&Cs Apply.