Stupid pension question

[Mushroo]

I fear this is a stupid question, but I can’t get my head around it!

I have a defined contribution pension and I understand that compound interest plays a big role in the pot growing. A lot of people say that’s why you need to start early.

I’ve been paying in for about 10 years and my returns were about 10% or so before this year. However, because of the market fluctuations, my pension is now worth a lot less, and it’s showing at 1% growth.

Does that mean I’m basically back to square 1? And the previous 10 years mean nothing?

Help!

It’ll go back up again don’t panic - long term the market fluctuations smooth out

No.
In year 1 you contributed £100 (maybe a smidge more)
It grew by 10% so you had £110
Then you contributed another £100 so you jave £210 which grew by 10% and you had £231
Year 3 and other investment to £331 and 10% growth £364
And so on...

To cut a long story short let's pretend year 4 is your 1%
So you contribute another £100 so your pot is £464 but you only have 1% growth so your pop is £470

Maybe I misunderstood. 1% over the whole term or just this year?

Even if it's 1% over all ten years with my example of 4 years growth you would have
£410 in your pot.

@KatyN thank you, I’m not even sure!

If we take an ISA for example (which I think works the same), at one point I had ‘gained’ £1000, but currently I’ve lost £600.

Does it mean if the markets happen to be down when I retire I could have less than I put in?!

Yes.

However when you get close to retiring (5-10 years) your pension crew will suggest you put your money in a 'safer' investment.
When you are younger you can be fancy free and 'gamble' your pot to get the maximum returns. Then you go safer as you get closer.
Of course you can say you always want to play it safe, but the safe investment is sometimes lower than inflation so you would effectively be loosing money

You don't have to take it all out and put it in an annuity when you retire nowadays so the advice to move it to safer funds in the last few years is not the best advice for everyone, many use drawdown where you take out money as you need it and then aim to keep the pot growing to recover what you took out IYSWIM. When you get to within 5-10 years of retirement it is important to have good hard think about this and look into the options available, taking financial advice if the sums are large.

Does it mean if the markets happen to be down when I retire I could have less than I put in?!

Yes, that's the risk with investments. The value will fluctuate and although in the long term it will probably be unlikely that you'll have less than you put in, it's certainly the case that the value of what you cash in or take as draw-down will depend on the market at the time and the value isn't guaranteed to be a certain amount.

As PPs have said, with pensions it's wise to move some of the pot to 'safer' (ie less changeable) investments the closer you get to retirement to reduce the risk of the total value falling if you need to withdraw money at a time when the market is very low.