If you’re invested in a workplace pension, like most people in the UK, you may have seen the value of your pension drop recently, following the Coronavirus outbreak and global repercussions of this crisis.
While this ‘new normal’ world of ours might have us all panic-buying loo rolls, it’s important not to panic-invest your pension. To help you understand and manage your pension account during these turbulent times, read our eight top tips.
1. Volatility is a normal part of long-term investing
It’s never nice to see your pension fall in value, not least when there is so much uncertainty about, but the most important point to remember is that this could well be nothing more than a temporary setback. If you look at what’s happened in the past, there have been some real challenges over the years, but from a long-term perspective many are little more than blips in the markets’ progress.
It is worth noting, past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon.
2. Long-term investors can be rewarded for not shying away from risk
Investing in shares is riskier than keeping your money in cash, that’s a universal truth. But it is also true that risk can be rewarded with higher returns.
The effect on retirement savings will vary for different people. Factors such as how far you are away from retirement, which funds you are invested and in and how much diversification you have in your investments will all play a part.
Where the situation gets more complicated is when you don’t have years to wait for a recovery and then further growth – or, to put it another way, you’re getting close to retirement. If you’re in this position, there are two key things you can do. First, think about where you’re investing. And then consider the income you need.
3. A stop/start approach is lose/lose - try to maintain your pension contributions
With so much uncertainty about, you’re probably taking a long hard look at your finances and thinking about where you can make cuts. If you are considering reducing your monthly pension contributions, think long and hard.
Check the contributions that your employer is making to your pension savings - have you made the most of what’s on offer? Some employers will contribute a basic amount to your pension plan and offer to contribute more if you do too - essentially, it’s free money for your future. And now, more than ever, we all need to be thinking about our future finances.
4. Regular savings stack up
There’s another reason why you should keep contributing to your pension pot, despite current market turmoil. Maintaining this savings habit is a good way to stay on track with your goals, but it has the additional benefit of taking advantage of the ups and downs in the market too.
When markets fall you automatically benefit by getting more shares or units for your money. This is known as ‘pound cost averaging’ because it can be considerably lower than the average price you pay for your investments. And, if you buy when prices are low, you could reap all the rewards when they rise again. Although it is worth remembering that past performance is not an indicator of future returns.
5. Diversify, diversify, diversify
Second-guessing where, never mind when volatility will strike, is far from easy, which is why making sure you don’t keep all your eggs in one basket is key.
Having a mix of assets from shares and funds to bonds and cash, across different sectors and geographies is the best way to ensure that one spell of volatility doesn’t take your entire portfolio down with it. Spreading your assets means sharing the risks and is an essential for any investor.
When you joined your company’s pension plan, your contributions were most probably invested into something called a ‘default investment’. All employer sponsored pension plans have them, and these look at diversifying your assets across a range of investments.
6. Make the most of compound interest
Can you afford to put a little bit more away for your future now? Your automatic response is probably ‘no’, but the earlier you get into the habit of investing for your future, the better - even if you just put away a small amount more.
By increasing your pension contributions, you have a longer time for that money to grow and benefit from compound interest. Now that might sound like a negative term, especially if you have experienced loans and credit card debt, but in the world of pensions, compound interest can work for you - save more, save early and maintain your contributions and you can ensure that today’s volatility does not impact your long term retirement savings.
7. Don’t blindly follow the herd
Easier said than done but being able to resist general investor sentiment, rather than blindly following the herd, can mean you have the space to be more free-thinking in your investment decisions and can spot the opportunities the crowd misses.
That’s not to say that the herd always gets it wrong, but following blindly, without having your own good reasons for buying or selling, is a fool’s game. Being disciplined enough not to allow euphoria or undue pessimism to cloud your judgement will hold you in good stead.
8. A reminder to get on top of your pension paperwork
Now is as timely a reminder as ever to make sure you are on top of your paperwork. Use that extra time at home to get on top of your pension paperwork. If the worst were to happen, and you didn’t make it to retirement, your retirement savings can be passed on to your loved ones as a cash amount. But you’ll need to let your pension provider know who you want this money to go to, should you die before taking the benefits from your pension plan. You do this by completing an ‘Expression of Wish’ or ‘Beneficiary’ form. If you haven’t done so already, get this done - it will take you five minutes to do. Log into PlanViewer or ask your pension plan provider or employer where to get hold of this form.
Important information: The value of investments can go down as well as up, so you may not get back the amount you originally invest. Withdrawals from a pension product will not normally be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.