Q I began paying into a pension last year and I contribute a regular monthly amount. I have noticed the current value is less than the contributions made. I have some questions about this. Firstly, why is this? Is it likely to continue this year or beyond? Should I stop my contributions until things settle down? And finally, my broker recommended I “stay the course” and to stop checking my fund performance repeatedly, but is this ill-advised?
A Your first question, i.e. why your pension contributions and current value are not equal, is a common question amongst people just starting to pay into their pension. It is naturally disconcerting when your investment indicates it is worth less than the amount we put into it, but you cannot look at pension savings in the short term.
When you are young, your pension will be more heavily invested in stock market shares. Your investment needs to deliver strong returns, most often found in the stock market, so, you will be provided with the retirement savings you hope for. It also means you also have time to recover from market setbacks as, over the longer term, stock markets tend to deliver, even if individual stocks do not.
It is normal for greater risks to be taken when you are younger to build up your pension pot. These risks should be reduced as you get older and come closer to retirement, because you will not have the time to recover losses, should they occur later.
There is always an element of risk when we ‘play’ the stock markets, because they fluctuate according the economic principles of ‘supply and demand’. Despite current ongoing economic uncertainty, inflation, rising interest rates and risk of recession, markets have recovered somewhat.
Regarding your question ‘Is it likely to continue this year or beyond?’ The answer to this question is largely unknown, but despite recent setbacks, noticeable in your ‘pot’, it is likely your contributions have been buying into stocks at the cheaper end of the cycle. If this is the case, it will benefit you as the market picks up.
Finally, I do not recommend stopping pension contributions “until things settle down”. Early investment in a pension is one of the most critical factors in determining your financial wellbeing in retirement.
While it is sensible to keep a watchful eye on your savings because as circumstances change, there may be an adjustment strategy required, I agree with the majority of financial advisers or brokers who advise against keeping too close an eye on short-term performance.
Checking in after three to five years to assess how things are going provides a clearer picture of overall performance. Monthly (even annually) may be excessive because fluctuations are common in the short term.
Also, for some people who pay into their pension, it’s important to remember that, if your employer is making a pension contribution on your behalf then this money may be surrendered by stopping their pension saving. Remember too that, to some degree, you are playing with ‘free money’ because you get tax relief at your marginal income tax on contributions to your pension, i.e. if the money was not going into your pension, you would be paying up to 40 per cent on it, which is another incentive to continue to contribute.
With Philip Cullen of Southeast Mortgages & Financial Services
This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article.