Pension investment options – an overview
When you save for a pension, you shouldn’t focus only on how much you’re putting into it. You should also regularly review how it’s being invested. And as you get older, you should probably change your investment strategy to reduce risk as retirement draws closer.
Do you need to make pension investment choices?
Personal, stakeholder and defined-contribution workplace schemes
If you have a personal or stakeholder pension, or money in a workplace defined-contribution scheme – including the new NEST scheme – you will normally have to make investment decisions.
Pension providers often try to make it as simple as possible to decide what to do. Typically they offer a range of funds, allowing you to choose from a number of broad investment strategies that are suitable for most people.
Usually there is also a default option, so that if you don’t make an active choice yourself, the pension provider will invest your pension in a fund that’s designed to be appropriate to as broad a range of people as possible.
Defined-benefit workplace schemes
If you’re a member of a workplace defined-benefit schemes, your position is different. Your scheme promises the retirement income you’ll get, so it’s your employer not you who takes the investment decisions (and risks) needed to reach that target.
But even if you’re in a defined-benefit scheme, you might still need to make pension investment decisions at some point – for example, if you decide to boost your pension savings by making additional contributions to a defined-contribution scheme.
What are the main pension investment options?
Most pension plans offer a range of different investment funds that are designed to invest your money in different ways over the years until your retirement.
- In general, you need to choose a fund that offers the broad investment strategy you want.
- All the details – such as the choice of the specific assets that the fund invests in – are handled by the particular fund’s investment experts.
Investment funds usually invest in a number of key categories of asset, including shares, bonds and cash. You will probably be offered a choice both of funds that:
- specialise in specific assets – eg a fund focusing on shares in European companies
- invest in a mix of different assets – eg a fund investing in both global shares and government bonds
Most people choose to invest their pension in the second type of fund, because spreading – or diversifying – your investments between different types of asset is a good way of managing risk. You could also diversify your investments in this way yourself, by dividing your pension savings between a range of specialised funds. But this requires more time and financial knowledge.
Over the long term, shares have historically tended to perform better than bonds or cash, which are lower-risk investments. So a common strategy is for people to invest in a fund mostly holding shares until they get closer to retirement, and then start to lower the risk profile of their investments.
This shift isn’t something you need to manage yourself. Many pension plans offer a ‘lifestyle’ fund, which automatically shifts the balance of your investments towards less risky assets (such as bonds and cash) as you near retirement. ‘Target date’ funds work in a similar way.
If you have a relatively large pension pot, you can take greater control of your pension and access a wider range of assets by using a SIPP (self-invested personal pension). However, this is only suitable for experienced investors who are very comfortable with taking investment decisions.
The key things to consider when choosing
There’s no need to overcomplicate your investment decisions. Keep a few things in mind and you should be off to a good start.
Invest for the long-term
Don’t shy away from investing in shares, unless you’re close to retiring. You want your investments to grow and that’s difficult to achieve if you only choose investments that are conservative, such as cash or bonds. Shares have on average tended to perform better than cash or bonds over the longer term, but you need to be aware that there are no guarantees they will always do that.
Don’t put all your eggs in the same basket. If you choose a basic managed fund this should be well diversified already, so you may not need to spread your money further. However, if you choose highly specialised funds, you will probably want to pick a few reasonably different ones to spread your risk.
What are the fees and charges?
Check how much the different funds on offer charge – only choose funds that have competitive charges.
Review your investment choices every year
You may not have to make any changes, but it is good practice to check your investment choices yearly to make sure they still reflect the level of risk you are comfortable with and that charges have not gone up. This becomes even more important as you get closer to retirement – you will probably want to move into more conservative investments at that point.