Pension Drops.

kimwp

What  I've asked my advisor to explain (waiting for an answer still) is - once my pot gets above 60k again, what will TP do with the additional funds - do they re-invest in other stocks, does it earn interest, or does the whole thing just go up and down for ever and I hope for the best that its in on an upward curve once I come to need it ?

When you put money in, it is used to buy shares. As those shares go up and down in value, your pension goes up and down in value.

You don't earn interest. If the value goes up, you don't now have excess money to buy other stocks, you just have the same amount of stock as you initially bought, but each is worth more than when you bought them.

almost-bankrupt

kimwp said:

What  I've asked my advisor to explain (waiting for an answer still) is - once my pot gets above 60k again, what will TP do with the additional funds - do they re-invest in other stocks, does it earn interest, or does the whole thing just go up and down for ever and I hope for the best that its in on an upward curve once I come to need it ?

When you put money in, it is used to buy shares. As those shares go up and down in value, your pension goes up and down in value.

You don't earn interest. If the value goes up, you don't now have excess money to buy other stocks, you just have the same amount of stock as you initially bought, but each is worth more than when you bought them.

This is exactly what I was wondering about - so why are people saying that over time it will gradually increase if these shares can just go up and down at any time ? 

MallyGirl

because over time the general trend is up.

kimwp

almost-bankrupt said:

kimwp said:

What  I've asked my advisor to explain (waiting for an answer still) is - once my pot gets above 60k again, what will TP do with the additional funds - do they re-invest in other stocks, does it earn interest, or does the whole thing just go up and down for ever and I hope for the best that its in on an upward curve once I come to need it ?

When you put money in, it is used to buy shares. As those shares go up and down in value, your pension goes up and down in value.

You don't earn interest. If the value goes up, you don't now have excess money to buy other stocks, you just have the same amount of stock as you initially bought, but each is worth more than when you bought them.

This is exactly what I was wondering about - so why are people saying that over time it will gradually increase if these shares can just go up and down at any time ? 

Definitely not an expert, I did a bit of reading, decided on a strategy of a low cost whole world something or other fund and am going to stick with that for 20 years... But my understanding is -

Some people "invest in" ie gamble that specific company or industry shares will go up because the company will gain value, so they try to buy when the shares are low and sells high to make money. The principle of this is easy to understand, but any certainty of making money means being able to predict the future.

Another way is to invest in a fund that tracks an index. Eg HSBC publishes a list of top 100 companies and the fund manager buys and sells as companies drop in and out of this index. I don't quite understand this because selling them when they drop out of the index and buying when they enter it seems to be selling low and buying high, but I guess if the companies are doing well, then their shares will generally go up in value. I don't think you actually own shares in this scenario, I think you "own" a bit of a fund and your money is pooled together for the fund to buy shares.

You don't have the money until you sell the shares. Until then, it's just potential value of what you might sell them at.

almost-bankrupt

Thanks for all the patient answers, i have a much better understanding now. 

Pat38493

almost-bankrupt said:

kimwp said:

What  I've asked my advisor to explain (waiting for an answer still) is - once my pot gets above 60k again, what will TP do with the additional funds - do they re-invest in other stocks, does it earn interest, or does the whole thing just go up and down for ever and I hope for the best that its in on an upward curve once I come to need it ?

When you put money in, it is used to buy shares. As those shares go up and down in value, your pension goes up and down in value.

You don't earn interest. If the value goes up, you don't now have excess money to buy other stocks, you just have the same amount of stock as you initially bought, but each is worth more than when you bought them.

This is exactly what I was wondering about - so why are people saying that over time it will gradually increase if these shares can just go up and down at any time ? 

Because over all of past history that we are aware of, they always went up in the long term gradually in the same way that global governments try to manage GDP to go up each year.

Example - if you are invested in a global equity tracker you are, per definition, tracking the entire global economy more or less.  The global economy has always grown bit by bit, and it needs to at least to keep up with inflation.  The tracker will most likely have a mix of all the most quoted and successful companies in each country so per definition you own a stake in those at any one point in time, so likely it will actually grow faster than inflation in the long term on average (born out by historical detailed data over more than 100 years and less detailed data for a lot longer).

If you want to get a bit more complicated about it - if you are invested in a fund, the changes in the fund will be a combination of:
- Share value increase or decrease of all the shares in that fund.
- Income from any dividends that are paid out to shareholders of that company.

Many pension funds are so called "accumulation funds" so you just will see the value of fund units changing and the income part is automatically reinvested by the fund manager without you seeing anything.

Some funds also have an "income" version of the fund where any dividends, instead of being reinvested, are paid out to you as cash, and you can then choose whether to reinvest them or take them out (keeping in mind that if it's in a pension wrapper you still can't take them out until you reach the relevant age).

By the way another side effect of this is that in a negative year or bad period where the unit price of your fund has gone down a lot, the instinct is to panic and sell your fund "at the bottom", but actually the better thing to do is to buy more of it (buy low sell high and all that).

It's also worth keeping in mind that generally there are big tax advantages to saving in to a pension, so this will add even further to the benefits of investing the money rather than for example keeping it in a savings account.

kimwp

I remembered just now that there are accumulation funds and income funds. Searching online, they talk about interest, so maybe some funds do give interest. I was trying to find how this interest is generated and all I could find was at the link below- where the fund is invested in companies that pay dividends.

https://www.investopedia.com/terms/e/equityincome.asp

I think if I were you, I would take two approaches - think about what you want from your life/money and discuss with your IFA how best to achieve that. Also do some reading about the investment world so that you're an educated customer when you talk to your IFA.

MetaPhysical

There's been a 2% drop in the last two days in my fund, dropped 11k from 510k.  It's the way investments work, they move up and down, but more generally, up.  I do not normally check regularly but have been doing due to a pension transfer I recently made.

Strummer22

almost-bankrupt said:

Hi - I'm a nervous person when it comes to money, probably because I grew up in abject poverty. My accountant recommended I finally open a pension as a good way of getting money from my LTD company for the future.
My financial advisor recommended True Potential, the low risk pension category to start with, so i brought over 60k from my company to get it going. In the space of 2-3 weeks it's just dropped every day, and now it's around minus £500. This makes me very nervous. My advisor just tells me its 'futile' to check before the end of the next year, and doesn't seem to answer my questions on the workings of it all, and how I'm supposed make money on such a thing.

So my question is - is this normal or is it a poor starting pension with not much hope. I'm thinking about taking the money back out and investing in something more tangible like property.

Thanks in advance for your experiences.

Not sure if anyone has addressed this yet, BUT:

I hope you are planning to continue investing regularly! Monthly is typical. 

Two reasons I mention this:
1. if you expect your £60k to grow into a pot you can retire on, you'll be disappointed. 
2. buying once means you only have a chance to buy at a single price.
      a) Global equities recently approached or exceeded record highs, so you bought the market high. This is not a terrible thing to do; you never know whether it's better to buy now or wait (except in hindsight) so you might as well buy now. However, the markets have reacted as you might expect to Israel and Iran having a game of slaps/starting WWIII (delete as appropriate). Most people will have seen their pension funds drop in value. The only people who could lose out significantly as a result are those about to take a 25% tax free lump sum. Everyone else should just ignore the noise.
     b) Furthermore, if you invest more money now, you'll be able to get the same investments at a cheaper price - so when the market rises again you'll end up better off. 

Albermarle

almost-bankrupt said:

Thanks for all the patient answers, i have a much better understanding now. 

or does the whole thing just go up and down for ever and I hope for the best that its in on an upward curve once I come to need it ?

Your question here has been largely answered but probably one further point needs making.
Normally when you retire and start to take your pension, you do not take all of it at once. You may take it over 30 years, so it will continue to go up and down over that period as well.

Unless you buy an annuity with it.