What’s my pension pot got to do with the stock market?

Growing your pension pot doesn’t happen overnight - investing plays an important role on your path to pension success. Here’s a quick guide to where your pension is invested – and why you might see your pension value move up and down.

What happens to the money in my pension pot?

Unlike a Defined Benefit (DB) pension where you get a guaranteed income at retirement, the income you get from a Defined Contribution (DC) pension is dependent on the value of your pension pot. So, to help your DC pension pot potentially grow further, the money in it is invested.

So, my pension is invested in the stock market?

Some of it probably is, yes. But not always. There are actually quite a few different ways your pension pot can be invested. So, let’s go into a bit more detail.

How does pension investing work?

The money in your pension pot goes into an investment fund or funds, which are made up of different asset classes. This can include shares in companies that are listed on the stock market, or in commercial property, government bonds, cash, or even overseas investments. Typically, when the investment funds you’ve invested in perform well, the value of your pension pot will increase. But if they perform negatively, the value of your pension pot will fall and could be less than has been paid in.

If you don’t remember making changes to the funds your pension pot is invested in, your pot is probably in the pension scheme’s ‘default fund’. This is a fund typically comprised of a mix of asset types and can invest in different markets domestically or across the globe. It is designed to meet the needs of most members.

What’s going on at the moment?

Trump's recent tariff announcements have sent global markets into the red, which may have caused the value of your pension savings to go down. This can be alarming – but does it mean you should look at moving your money to ‘safer’ investments?

The short answer is no - it may sound like a no-brainer, but history suggests this is one of the worst things you can do. It’s human nature to want to do something but taking money out when investment values are low will simply ‘lock in’ the losses - and it’s very common for the value of investments to rise and fall in the short term.

Keep calm and carry on

Saving regularly during periods of low investment values can have some surprising benefits, thanks to ‘pound-cost averaging’. Investments are divided into ‘units’ of equal value. When the value of investments goes down, the value of your savings falls – but the price of the investment units also goes down.

This means you can afford more investment units with the same amount of money. And you have more units to increase in value when markets recover, as they generally do.

So, counterintuitive as it sounds, it could be a good time to think about putting more into your pension savings – although this is never a bad idea. You’ll be buying more low-priced investments to increase in value when investment markets start to rise again.

Who’s managing my investments and how does it work?

Your investments have people looking after them. Fund managers (investment experts) regularly buy and sell the shares within your fund to try and increase its value. Performance is measured in ‘investment returns'.

Let’s use a totally-not-fake company as an example. Your fund manager buys shares in a tech company called Banana Inc, who are listed on the stock market for £1 a share. Banana releases a new gadget – the Banana-phone – and with all the excitement around the launch, Banana’s share price rises to £3. If your fund manager were to sell some of the shares at this higher price, you’d make an investment return of £2 per share (£3 minus your £1 initial investment = £2).

But it’s not always the case that investments will increase. Banana Inc might have a PR disaster, which could lead to the share price dropping for a while. When monitoring the funds you’re invested in, it’s important not to panic if you see their value go down. Investing is a long-term commitment, after all.

But wait, if a fund manager is taking care of my investments, then why should I pay attention to them?

Ultimately, it’s your responsibility to check up on the performance of your investments and see if they’re working hard enough for you. We all have different retirement aspirations, after all.

There are a few reasons why you might want to get more involved. For a start, different funds come with different levels of risk. The riskier the investment, the higher the potential return on your money, but also a higher chance of losing money. You could even lose more than has been paid in – there are no guarantees. Some default funds are set up to have slightly higher levels of risk when you’re younger, and move to more balanced, lower-risk investments as you get closer to retirement age. But depending on your appetite for risk, you might want to make changes to increase or decrease the amount of risk you take over the years.

You may also want to pay close attention if you have strong moral or ethical values. A lot of funds still invest in companies that some people might disagree with – like oil and gas companies or weapons manufacturers. If this is something you’re passionate about, you could take action to switch your investments to more sustainable investments instead.

What’s more, some pension providers offer funds that accommodate different religious beliefs. You might be able to choose a Shariah fund, for example.

So I can choose my own funds?

That’s right. Most pension providers have pre-made fund portfolios to choose from based on different levels of risk, or on how ethical the funds are. If you want to get into the nitty-gritty, you can also choose each individual investment within your fund. This is where things can get quite complicated, so if you're not comfortable choosing your own funds, we recommend speaking to a financial adviser to talk through your options (there will likely be a cost for this).

Okay, what do I do next?

Watching The Wolf of Wall Street is a good place to start.

Only joking; Leo and Margot can’t help you on this one. But if you do want to learn more about how your pension is invested, you should take a look at your annual benefit statement – which may have been posted or emailed to you. If you can’t find it, you can request one from your provider. You can also view details of your pension online on your provider’s website or app if they offer this option. There you can access fund factsheets and key investor documents which outline how the funds are invested.

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