Uncertain times and market fluctuations – what does it mean for your pension investments?

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There’s a whirlwind of financial news to get our heads around. With events changing daily, markets and the pound have been down one day or hour and up the next. What does it all mean for your pension investments? Here’s what you should consider. 

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In uncertain times like these, it’s natural to be feeling concerned about the impact on your pension plan and other investments, especially against the backdrop of a cost-of-living crisis.

Reacting in the short term can make losses worse, so it’s important to take a step back and think about the longer-term picture.

• Markets are reacting to a number of huge global economic challenges that are happening all at once 
• Significant market moves up and down in response to economic and global events are normal
• It’s not all bad news – with many investments selling at less than they’re worth, those regularly paying into their pensions are effectively getting more for their money
• Pension investing, and in particular the options we offer, are designed with the long term in mind 
• When it comes to investing, reacting to the short term can result in further losses – it’s important to focus on what you can control
• Your investments are being managed by teams of specialists who are constantly monitoring market and investment behaviour
• If you've decided to choose your own funds, it's important to check that these are appropriate to meet your long-term goals.

What’s happening?

Global financial markets are reacting to a lot of major economic and political events happening all at once. These include our emergence from Covid, the war in Ukraine and increasing inflation concerns in most major economies.

In the UK, the string of events following the UK government’s mini-budget, the subsequent reversal of most of the proposed changes, then the resignation of Prime Minister Liz Truss, added to the rollercoaster for the pound and markets.

While the events triggered by the UK mini-budget are dramatic in their own right, they’re just one set of many longer-term challenges markets are facing just now.  

It’s not all doom and gloom

While there’s a lot of challenges for investors to contend with, there are also some positives.

Firstly, the current climate means that many investments are essentially cheaper than normal – selling at less than they’re actually worth in the long term. So, the money you and your employer are paying into your pension is effectively buying some investments at a cheaper price. In other words, you’re getting more for the money invested in your pension.
 
Secondly, a falling pound is actually good news in some cases. This is because a large portion of revenues for the largest UK companies listed on our stock market is generated outside the country. So when the pound is weak versus other currencies, these companies benefit when they convert their revenue back into sterling.

Your pension is invested for the long term

When you're invested in a defined contributions (DC) pension product, it's designed to help you build up your pension pot over a long time. History shows that over the long term (usually more than 10 years) markets have weathered many financial storms and risen in value. 

No one can predict the future, growth can't be guaranteed, and remember that past performance is not a guide to future performance. But it’s key to look at how investment markets have typically performed over a greater number of years – and how your pension investment has performed in relation to this.

You can find out more about this in Market fluctuations and your pension investments – here’s what to consider.

You’ve maybe seen some news headlines about the impact market volatility has been having on pensions. However, it’s worth remembering that this is most likely to be referring to defined benefit (DB) pension products (also known as final salary), which are managed differently to DC pensions. So the impact of market volatility, like we’ve seen recently, on DB pensions is also different.

When it comes to DB pension schemes, it’s up to the pension trustees to choose where they’re invested. It’s also their responsibility to make sure there’s enough to pay to employees or former employees when they’re taking their retirement savings. If the employer becomes insolvent and its DB scheme is unable to pay members their pension, a statutory public corporation, known as the Pension Protection Fund  steps in. Its duty is to protect people with DB schemes if this happens.

With a DC pension plan, you have the option to choose your own funds if you feel like you have the time, knowledge and confidence to do so, or your employer or adviser may have done this for you. And you can decide how you want to take your money in retirement. For some DC pension plans, you may be eligible to claim compensation as a last resort from an independent service called the Financial Services Compensations Scheme (FSCS). This would be in the event that an authorised financial firm fails and ceases trading. It does not provide protection against investment performance.

Reacting in the short term could make things worse

You may be tempted to make changes to where your pension's invested or, if you've money invested in other products, you might be thinking about cashing in your investments. But here’s the most important thing to consider: you’re likely to be selling after markets have already fallen and, importantly, before they rise again. So that means that you’re not only locking in your losses but also missing out on the expected eventual recovery; so you’re feeling the pain of loss twice. 

You may wonder why not get out when things are bad and just get back in when they improve? But if you didn’t expect the fall, how would you know when the recovery is coming? Even professionals, with all sorts of data and analysis to hand, can’t always ‘time the markets’ – it’s incredibly difficult to do. 

Consider your circumstances

No one can predict what will happen next. But with so many economic challenges to contend with, we expect to see more volatility in the months ahead. 

With all this going on, it’s important to consider your own circumstances. For example, you might be some way from retirement, about to access your pension money for the first time, or already taking money from your pension plan. 

It’s a big decision to make changes to your pension plan and it could impact how much you’ll have in the future. So you may want to take professional advice before making any decisions. If you don’t have a financial adviser, you can find a list of advisers on the FCA website. Unbiased is an independent site that can help you find the right adviser for you. 

If you have a Standard Life pension plan, you can easily check where you’re invested by logging in or registering for online services. We design our pension solutions with a genuinely long-term mind-set and continuously monitor them. Financial managers are considering all the risks and opportunities, now and way in the future, aiming to grow your pension pot for when you need it.

Find out more about investing and cost-of-living support

To find out more about investing take a look at our investment guides, which aim to cut through the jargon and help you understand the basics. 

We understand that the current financial market volatility is happening amidst a cost-of-living crisis, adding to wider financial worries. You can find help and support on our website. Or read our other articles.

The information in this article should not be regarded as financial advice and is based on our understanding in October 2022.

Remember that the value of pension plans and other investments can go down as well as up and you may get back less than was paid in.