Can My Pension Lose Money? 3 Things You Should Consider

Watching your pension pot lose money is likely to be worrying, especially as you approach retirement and are looking forward to your golden years. However, this is entirely normal, as a defined contribution (DC) workplace pension can decrease in value for a number of reasons.  

A DC workplace pension is the most common pension plan in the UK. The money, which is made up of your own contributions, your employer contributions, and tax relief from the Government, buys 'units' in a chosen pension fund. Depending on your pension plan, these units (representing your money) are then invested in assets such as stocks, government bonds, properties, and company shares.

This article will explore three things you should consider when your pension is decreasing in value and what you should do. 

Your Investments

When you're investing in a pension plan, you're actually buying units in the pension fund. The value of these units can change every day, both up and down, depending on the performance of the investments that have been made by your pension provider.

Most people do not make pension investment decisions on their own behalf. However, you should check that the way your pension provider is investing your money matches your financial goals, as it can have a significant impact on the amount you have available when you reach your golden years. 

Market Fluctuations

Fluctuations in the global financial market can also play a key role when your pension is losing money, especially when the market is highly volatile, as it is currently. 

Economic uncertainties like rising energy prices and inflation, disease outbreaks like Covid-19, and wars like the Russia-Ukraine conflict can all impact global financial markets in their own way. When these financial markets experience a rise or fall, it affects all types of investments, including those made by your pension provider.

Switching to a lower-risk plan might feel like a sensible move when you see your pot shrinking during volatile times. However, that could actually lock in your losses, as you're effectively selling those investments while they are worth less. 

Markets do often recover from a fall, and because your pension is a long-term investment, any decreases in value are likely to be short-lived. That said, there's no guarantee either way, and investing always carries risks.

The Contributions

Changing your pension contributions doesn't automatically reduce the existing pension pot. However, it can affect your pension income in other ways, such as: 

Less government tax relief: The smaller the contributions you make, the less government tax relief you get. For example, if you contribute £48,000 of your take-home pay per year, the Government will contribute £12,000 in tax relief. However, if you only contribute £4,800, the Government will contribute £1,200.

Less growth over time: The smaller the contributions you make, the less capital is available to grow over time. 

Missed employer contributions: Employers in the UK only legally have to contribute 3% of your qualifying earnings to your pension pot, so if they are contributing more than this to match your personal contributions, you're lucky. Reducing your contributions to your workplace pension might reduce or eliminate your employer's matching contributions. That's free money you're missing out on.

In addition, stopping your monthly or yearly pension contributions altogether can also reduce the size of your pot. This is because your pot will become entirely reliant on the returns of your investments, which can fluctuate, rather than future contributions from you, your employer, and the Government. 

Final Thoughts

It's concerning to see your pension losing money, but it's essential to remember that what matters most is the value of your pension over time. The decision to move your pension pot because of a short-term dip in value means the losses become real. 

The best course of action is to leave your pension to recover from any fluctuations. It's been proven that, over time, pensions consistently provide gains for those in the UK ahead of their retirement. 

As long as you're prepared to see your pension pot shrink at times, then use your provider's online service to check on the current value of your pension pot and monitor it over time. Your current employer, previous employers, or pension provider will be able to help you access your pension plan online.