When we think of investing money long term, for example in a pension, we talk about interest rates and compound growth, with the expectation that our money will increase over time.
This isn’t always the case though. As the caveat on financial articles often says: “The value of your investment can rise or fall.” This is a simple concept to grasp in abstract, but what happens when you face this situation in reality? When you check your pension account and find, to your horror, that the value has dropped?
The first thing you should probably do is usually quite simple: nothing. Certainly, you shouldn’t immediately panic.
It might reassure you to know that a temporary drop in your pension value is historically normal. The stock market has always been volatile; in the last six years alone, we’ve seen three big worldwide crashes: 2025 (when Trump announced tariffs), 2022 (stock market decline) and 2020 (Coronavirus lockdowns). And it has bounced back from all of them in time.
In fact, long-term investors often benefit from slumps like these, as they are able to buy more investments for the same cost. So if you are investing for your future, you may find that dips in the market actually help your money to grow.
Here’s another thing to remember: until you ‘crystallise’ your money (take it out of your pension), any losses are just on paper.
Which brings us to the three scenarios you could be in regarding your pension, and how they may influence the impact of a stock market slump on your finances, and what action you may decide to take – or not.
Scenario one: You are saving into your pension for your future
If you are a few years away from taking money from your pension, a stock market slump shouldn’t unduly worry you. In fact, as described above, it may even help you in the long term.
If you are regularly paying into your pension, or planning on investing a lump sum, and can afford to do so, there’s no indication why a market drop right now should put you off.
Don’t be tempted to keep checking the value of your pension. You aren’t taking the money out now, and seeing numbers fall will only worry you – you’re human after all! Your investment should have plenty of time to recover and hopefully grow as the markets rebound.
Scenario two: You want to take your 25% tax-free lump sum
Once you have reached the age of 55 (rising to 57 in 2028) you can withdraw up to 25% of your pension tax-free. This can either be taken as a lump sum, or over time.
If you had planned to take out a lump sum from your pension right now, a slump in the markets will impact you as the value of your investment could be lower. If you can wait a few weeks or months, you may find that your 25% is worth more.
Scenario three: You are already drawing on your pension
If you are already taking money from your pension to live on, a slump in the market right now will be more frustrating. However, there are still actions you can take to protect yourself as much as you can.
If you have cash savings, such as ISAs or Premium Bonds, you might choose to switch to them and take less from your stocks and shares investments. You can always top them up later once the markets recover and you are happy to withdraw more from your pension again.
If you don’t have savings to fall back on, you might decide to tighten your belt for the moment and avoid any big purchases until the market bounces back and the value of your investments hopefully grows again.
Whatever scenario you are in right now, just remember that market fluctuations are a normal part of investing – and just as we benefit from them in good times, we have to expect a few rockier times too.
Hannah Martin is a pensions expert and the founder of Rich Retiree, an online resource aimed at helping women over 45 plan for a more rewarding retirement.
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