Should I be worried if my pension falls in value – and what should I do?

Why has my pension gone down?

If you have checked your pension and its value has decreased since you last looked, it can be confusing and unsettling – especially if you’re approaching or in retirement. 

However, a short-term drop doesn’t mean anything serious has gone wrong. At the end of the day, pension pots are invested, which means their value can fall as well as rise, and these inevitable fluctuations are part of the investment journey.

Explainer: why shares can fall in value

Decreases in people’s pots over the past few years were commonly down to volatility in the stock market caused by geopolitical and global trade issues or general market uncertainty.

Your pension can always take short-term hits from global events as geopolitics are among the many factors that can influence markets. Most recently, risks from the conflict in the Middle East have affected sentiment through rising oil prices and concerns about inflation. However, since the conflict started, markets have rebounded as the AI boom continues to gain momentum with the US markets regularly reaching new highs, despite pulling back more recently.

In periods of uncertainty, it’s natural to feel unsettled by bad news headlines. While markets can be volatile in the short term, a diversified approach and a focus on long‑term goals helps keep portfolios resilient. This is why we continue to emphasise balance rather than reacting to short‑term market movements.

If you’re closer to retirement, or in retirement, it’s likely that your pension portfolio includes more “safer” investments such as bonds. There is a common misconception that bonds can never take a drop in value. However, this isn't the case. They can contribute to a fall in the value of a pension pot. However, they normally provide shelter from the worst of the market volatility and continue to provide a regular income which is particularly important for retirees.

Learn more: How to ensure a comfortable retirement income

Explainer: why bonds can also fall in value

The price of a bond is inherently linked to expectations for interest rates and inflation. When inflation and interest rates rise, the price of existing bonds fall in value as investors require a higher level of return for the same level of risk. 

Bond prices will react differently depending on the life of the bond. This is known as duration risk. Bonds with a longer timeframe until they ‘mature’, say 10 years plus, will tend to experience greater price volatility compared to short-dated bonds. Longer-dated bonds have higher sensitivity because more cash flows happen further in the future so they’re more likely to be affected by interest rate changes.

Working example: 

You purchased a government bond which pays you a coupon of 3% annually. However, the Bank of England is expected to increase base interest rates from 2.5% to 3.5% to try to combat inflation. Now, newer government bonds are going to be issued at the same price, but with a coupon of 4% as interest rates have risen. 

Bond investors and pension funds prefer the higher-yield bond because it offers better returns for the same level of risk. So, existing bonds offering a return of 3% would fall in price to the point that they are equally desirable as the newer bonds offering 4%.

How much the price of a bond falls by depends on the size of the interest rate change and the bond's remaining life span. All else being equal, in simplistic terms, a bond’s price would usually fall by 1% for every 1% change to interest rates for each year remaining on the bond. For example, if a bond has a duration of 10 years, a 1% rate increase will cause the bond’s price to sell off by approximately 10%. 

My pension is losing money, what should I do?

Seeing the value of your pension pot fall can be very difficult to watch. But making rash decisions out of emotion is rarely a good idea.

Before jumping the gun and pulling the trigger on any investment decisions, it’s important to check the following:

• Have you checked your pension’s long-term performance to be sure you’re not overreacting to short-term drawdowns?
• Have you checked what your pension is invested in?
• Have you reviewed the amount of risk you’re taking? Is it too much or too little, hence the poor performance?
• Are you still on track to meet your financial objectives or income requirements?
• Have you spoken to a professional who can give you expert financial advice?

If your answer to the last point on our checklist is no, book your free 15-minute coaching call here: Financial Coaching | Book your free coaching session | Charles Stanley

To check for the long-term performance of your pension portfolio, you can normally see how it has performed via your online account or the individual factsheets. Be sure to view performance over at least a five-year period to get a clear idea of its performance. To help you paint a detailed model of what your financial situation could look like when you retire, use our pension contribution calculator: Pension Contribution Calculator | Pension checker | Charles Stanley

If you’re in retirement, you can utilise our pension drawdown calculator: Pension Drawdown Calculator for retirement income | Charles Stanley

How does the ‘average’ pension pot perform?

The performance of pension pots will largely depend on the amount of risk you’re taking and where it’s invested. On average, you could expect a return between 3-7% per year over the long term (10 years plus). Of course, there are no guarantees when investing and past performance isn’t a guide to the future.

However, there’s no strict norm. A young saver mainly in shares will see different returns to someone close to retirement in more cautious bond funds. But if you’re unhappy with the fund you are invested in and you would like your money to work harder for you, then you could change the fund that your pension pot is invested into to one that is better aligned with your goals.

Be aware that chasing an increase in gains could lead you into investments that are not aligned with your particular circumstances. Expert financial advice from a financial planner can help you understand your goals and can provide actionable steps to reach them for a comfortable retirement.

To help visualise what your goals could look like to live a minimum, moderate or comfortable lifestyle for retirement, and to compare where you are in the journey to the average pension pot by age, read this article below:

Read more: What is the average pension pot by age in the UK? | Charles Stanley

Why “Should I cash in my pension?” is the wrong question to ask

When you first access your pension, there are some advantages to cashing in part of it, especially if you are taking less than 25% or any amount up to £268,275 as a lump sum. This initial money is tax-free and can be used for peace of mind, such as paying off debt or large expenses. Although, it’s important to keep in mind the interest rates of any debts versus the pension’s performance. 

For example, if you have a remaining mortgage balance when you start retirement with interest rates of 4.5% and your pension performance averages 6%, you’re better off continuing to pay the outstanding balance monthly than clearing it immediately. However, investment returns are not guaranteed, and investments can fall as well as rise, especially over shorter periods, so paying off the mortgage in full could be the lower risk option.

But cashing in a pension entirely is usually not a good strategy, because it can significantly reduce your long-term financial security. You face paying income tax past the 25% allowance, potentially pushing you into a higher tax bracket. You may have to pay 20%, 40% or 45% depending on the amount withdrawn. Most importantly, you must also consider that you are missing out on years of compound growth, which could boost your retirement savings over time.

So yes, it can be unsettling to see your retirement fund to support you through the rest of your life decrease in value. But we must remember that there are ebbs and flows in the stock market constantly. 

As long as you have a clear image of the risks in your investments and are in it for the long haul, then there shouldn’t be any cause for concern. However, if you are close to retirement and worried about your future, our financial planners are on hand to discuss your specific situation. 

Read more: When can I withdraw from my pension?