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    • HustleGang
    • By HustleGang 4th Mar 18, 6:49 PM
    • 12Posts
    • 4Thanks
    HustleGang
    Understanding pension growth
    • #1
    • 4th Mar 18, 6:49 PM
    Understanding pension growth 4th Mar 18 at 6:49 PM
    I'll be honest I can't get my head around how pension funds grow as they're not interest my mind can't grasp this concept.

    If I have 1000 and interest is 10% after 1 year I have 1100. Then any growth in interest will now be based from the 1100.

    The pension fund doesn't make sense to me

    Balance current is 1046.11
    Growth rate 2.68%
    Value increase 15.20

    Growth rate seems to just fluctuate based on my contributions rather than growing of the growth?

    I've seen posts where people have old pensions worth 30,000 + that they hardly paid into when working, I'm not understanding how they grow.

    It's like an interest rate of 2.68% on 100 Which is 2.68 I should now have 102.68 Which is now what any growth should be based off, but it keeps basing the growth on on my my contributions.

    Can anyone out this in layman's terms for me please?
Page 1
    • dunstonh
    • By dunstonh 4th Mar 18, 7:30 PM
    • 92,620 Posts
    • 59,937 Thanks
    dunstonh
    • #2
    • 4th Mar 18, 7:30 PM
    • #2
    • 4th Mar 18, 7:30 PM
    Forget it being pension. Pensions are just a container for investments. So, whether it is ISA, pension or unwrapped holdings (investments held directly) they will work the same.

    An investment fund will hold dozens to hundreds of investments within it. Each of those has a daily value that can go up and down. So collectively, the fund value will go up and down with them. On top of that, those assets within the fund will pay an income. Typically dividends. That income can either increase the value or buy more units of the fund you are invested in.

    Whereas interest paid on a savings account is added once a month or year and can only increase the value, investments are valued daily and go up and down. A zig zag line if you think about it but generally heading upwards over time.

    Any fund figures stating growth over a period will be based on the assumption that you were invested on day 1 of that period. The more advanced software can show how monthly contributions have performed but the factsheets are just snapshots of the performance on exactly one day over a defined period.

    The value of the fund could be up 2% in January, down 1% in February, virtually unchanged in March, up 3% in April, down 10% in May, up 2% in June etc etc You have to take the negative periods, the positive periods and the nothing periods and average them all out over the long term. This is why investing is always said to be long term as you need to have all the periods in a cycle to get closer to the long term average.

    Growth rate seems to just fluctuate based on my contributions rather than growing of the growth?
    Doesn't everyone measures the growth based on their original contribution whether it is savings, ISAs, pensions or whatever? If you put 100,000 in a savings account and leave it there for 5 years, you look at what it made over those 5 years based on what you paid in. Investments are exactly the same.

    However, you can also look at discrete periods in isolation if you wish. The tools are there to do that. It may help if you named one of your investment funds so context can be given on something you actually have.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • AnotherJoe
    • By AnotherJoe 4th Mar 18, 7:48 PM
    • 9,413 Posts
    • 10,404 Thanks
    AnotherJoe
    • #3
    • 4th Mar 18, 7:48 PM
    • #3
    • 4th Mar 18, 7:48 PM
    I'll be honest I can't get my head around how pension funds grow as they're not interest my mind can't grasp this concept.

    If I have 1000 and interest is 10% after 1 year I have 1100. Then any growth in interest will now be based from the 1100.

    The pension fund doesn't make sense to me

    Balance current is 1046.11
    Growth rate 2.68%
    Value increase 15.20

    Growth rate seems to just fluctuate based on my contributions rather than growing of the growth?

    I've seen posts where people have old pensions worth 30,000 + that they hardly paid into when working, I'm not understanding how they grow.

    It's like an interest rate of 2.68% on 100 Which is 2.68 I should now have 102.68 Which is now what any growth should be based off, but it keeps basing the growth on on my contributions.

    Can anyone put this in layman's terms for me please?
    Originally posted by HustleGang
    If you were saving into an account that grew (had an interest rate of) at 2.68% and you saved over a year, then at 8.33 a month (100/12) you would not have 102.68, because the first 8.33 grows at 2.68% for the whole year, but the second installment grows at 2.68% for just 11 months, the third one for 10 months and the last one for just one month.

    With investments, the funds grow at different rates through the year. They may have started at 100 and ended at 102.68 for an average growth of 2.68% but that could be made up of month one 10%, month two -15% (yes, minus 15 %) , month 3 18% and so on.

    Hence teh growth rate is difficult to understand.

    Over time as the sum you have to start with each year increases, the monthly contributions become less relevant to the calculation

    In my savings example for instance, if you saved 100 a year, after year 1 you'd only have about 101.50. After ten years you've got 1,000 plus the interest on each year and the extra 100 you add in year 11 is much less important than whats already there.

    HTH
    • HustleGang
    • By HustleGang 4th Mar 18, 8:19 PM
    • 12 Posts
    • 4 Thanks
    HustleGang
    • #4
    • 4th Mar 18, 8:19 PM
    • #4
    • 4th Mar 18, 8:19 PM
    Hi all, thanks for the detailed responses I really appreciate your time and effort.

    I am invested 100% in a default working life strategy with fidelity, it's a company pension. I do wish to learn more about these investments and have a more hands on approach to picking investment funds myself at some point.
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