However, short-term volatility should not be a cause for panic. When you’re saving for retirement in a pension, you may be saving for 40 years – or even longer. So, volatility is something we should all expect and try to live with. Understanding this can help us stay focused on our long-term goal, even during periods of market uncertainty, and prevent us from making short-term decisions that we may regret.
What actions might cause concern?
When markets fall, it’s natural to feel uneasy. You may see the value of your pension drop in a very short space of time. Some may consider stopping their pension contributions, fearing further losses. Others, particularly those nearing retirement, might be tempted to withdraw funds early to avoid further declines.
These reactions, while understandable, can be detrimental. Stopping contributions means missing out on valuable tax relief and, in many cases, employer contributions. That’s a significant loss of long-term value. Similarly, withdrawing funds during a downturn locks in the losses and removes the opportunity to benefit from any future market recovery.
In fact, continuing to contribute during market lows can work to your advantage. New contributions can buy investments at lower prices, potentially enhancing the long-term growth. Staying invested and resisting the urge to react emotionally is often the most effective strategy.
Do we need to know how our pension is invested?
While it’s not necessary to become an investments expert, having a basic understanding of your pension is important.
Since the introduction of auto-enrolment in 2012, millions more people are saving into workplace pensions, but often with limited engagement. In fact, many people are unaware that their pension is invested in the stock market at all.
Most savers are placed into a default investment fund and remain there throughout their savings journey. These funds are designed to suit a broad range of investment needs and are managed with long-term growth in mind – for those who don’t wish to, or feel able to, make investment decisions for themselves.
However, understanding the basics – how much you’re saving, where your pensions are held, and what they might provide in the future – is essential.
The pensions industry is working hard to improve engagement. Providers are offering online tools, mobile apps, and educational content to help individuals better understand their retirement goals – and, in turn, better manage their retirement savings.
The investment basics of a pension
Pensions are among the longest of long-term investments most people will ever make. This longer time horizon allows pension schemes to invest in different types of assets, such as equities, which have delivered higher returns than cash or bonds over the long term.
Yes, this can be volatile. But over time, they tend to outperform other asset classes and provide growth above inflation. If too much of your pension were held in cash, the returns would likely be lower, and you could end up with a significantly smaller retirement pot.
Taking some investment risk is often necessary for long-term growth. The key is ensuring that the level of risk is appropriate for your stage in life. Younger savers can afford to take more risk, while those closer to retirement may need a more cautious approach.
Let’s say I’m in my 20s or 30s – how would I be affected?
For those early in their careers, the most important message is: don’t panic. Time is on your side. Markets will rise and fall many times before you retire, and history shows that they tend to recover and grow over the long term.
The best course of action is to keep saving regularly and avoid making changes based on short-term market movements.
What if I’m only five years away from retiring?
For those approaching retirement, market volatility can feel more immediate and concerning. With less time to recover from downturns, it’s important to plan carefully.
A drop in pension value just before retirement could reduce the amount of tax-free cash available or the income your pot can generate. For example – if you’re planning to buy an annuity, a lower fund value means a smaller annuity. However, annuity rates are currently higher than in recent years, which can help offset some of the impact.
If you have flexibility, consider delaying taking income or tax-free cash until markets recover. You might also use other savings, such as cash ISAs, to bridge the gap. It’s also worth remembering that you don’t have to retire and access your pension at the same time. If you can afford to wait, doing so may be beneficial.
“You never understood me, you never really tried.”
That lyric from Kate Bush’s The Big Sky could just as easily be spoken by your pension.
For many, pensions remain a distant, complex concept—until they’re suddenly needed. But the more we engage with them early on, the better we understand their value and potential.
While we can’t control the markets or predict the future, we can control how we respond. By staying informed, maintaining regular contributions, and avoiding knee-jerk reactions to short-term market movements, individuals can give their pension savings the best chance to grow over time.
When it comes to preparing for retirement, time, consistency, and a long-term perspective remain your most valuable allies.
Steven Cameron is pensions director at Aegon
