Updated 26 May 2021
Whether you have a workplace pension, personal pension, SIPP – or a combination of pension plans – it's important to understand how and where your pension fund is being invested by your pension provider, particularly as you move closer to retirement.
Essentially, a pension fund is a long-term, tax-efficient savings plan that you can access in later life when you want to work less or retire. Pension funds are made up of a portfolio of assets in which your pension contributions are invested, such as stocks and shares, bonds, cash and commercial property.
You can receive a pension from three different sources: the state, personal pensions that you've set up yourself, and workplace pensions from employers. Depending on the type of pension you have, you may be able to choose how your pension contributions are invested to best suit your plans and circumstances.
Workplace pensions come in two types:
If you have a workplace defined contribution scheme, your employer may offer you a default investment fund. This investment strategy is for people who can't or don't want to make their own pension decisions and is designed to reduce risk as the pension saver approaches retirement age.
In some instances, you may choose an investment fund yourself – this depends on the terms of the workplace pension scheme. You can do this by speaking to your pension provider or viewing your pension plan online and looking through the fund options. You may find it helpful to seek financial advice to help you decide which are most suitable.
If you're a member of a defined benefit scheme, it's your employer who takes the investment decisions and risks needed to reach the pension target that's been set. However, you may still need to make pension investment decisions at some point, for example, if you want to boost your pension savings by making additional contributions to a defined contribution scheme.
If you have a personal pension, stakeholder pension or self-invested pension plan (SIPP), you'll have a say in how your money is invested.
Your pension provider will offer a range of investment funds that are designed to invest your money in different ways over the years until your retirement. Again, there's usually a default option that invests in a broad range of funds to suit a wide range of people.
You'll probably be offered a choice of funds that:
Most people choose to invest their pension in a blend of assets because spreading – or 'diversifying' – your investments is a good way of managing risk.
SIPPs, in particular, are flexible plans that provide access to a wide range of assets and give you more control over how your money is managed. However, this option is best suited to those who have good financial knowledge and are comfortable making their own investment decisions.
Choosing a pension fund is a tricky decision, and generally isn't one to be made without first seeking independent financial advice. Your IFA will guide you on the best choice of funds to suit your particular stage of life and long term goals.
That said, there are certain broad strategies that their advice may follow. As a rule it makes sense to spread your money across different assets, sectors or geographic regions – rather than putting all your eggs into one basket. Many basic managed funds do this for you, but if you want to take a more active role, start by looking in detail at how you spread your risk across a range of investments.
You should also consider your 'investment style' and what you feel comfortable with, for example:
There are thousands of investment funds available to UK investors offering a wide range of options and levels of risk, including:
Investing in pensions funds is a complex matter, so you may find it helpful to speak to a professional financial adviser who can explain the intricacies of each option in more detail to help you make the best choice.
One of the biggest debates in investment revolves around the subject of active funds versus passive funds. Some investors believe it's best to invest in an actively managed fund, where a fund manager and team of financial analysts pick the shares they think will perform best. Others believe the best option is a passively managed fund, which mirrors the ups and downs of a specific market index. Here's a summary of both:
Choosing the right pension fund is important if you want to make the most of your investment. A young person just starting their career, or someone who has a higher tolerance for risk will opt for a different portfolio of assets than someone in the last few years before retirement who'd prefer a low-risk pension fund, particularly if they want the guaranteed income of an annuity.
As a guide, if you're less than 15 years away from retirement, it's a good idea to start moving some of your pension investments from funds that invest primarily in shares to ones that invest in bonds and cash. Many personal, stakeholder and workplace defined contribution pension plans offer a 'lifestyle' fund, which automatically shifts the balance of your investments towards less risky investments as you get closer to retirement.
If your pension isn't in a lifestyle or target-date fund, you can reduce the risk yourself by switching your pension from riskier funds to ones that have a lower risk. You might be able to do this easily online on your pension provider's website, although worth consulting a financial adviser unless you're confident about selecting the suitable funds. If you decide to switch funds, check if there's a switching fee and what the charges on the new funds will be.
Defined contribution pension schemes usually offer a range of different funds in which to invest your contributions. Your pension provider should provide detailed information about the various options available to you on a fund fact sheet. Before you invest in a fund, you should be given a Key Investor Information Document (KIID). This will explain the fund's investment objectives, charges and other information.
If you need help choosing a pension fund or want to review your retirement options, particularly in the decade before you plan to retire, speak to a financial adviser. Regulated financial advisers are authorised to give you advice and recommend suitable pensions products and investment options so you can look forward to a comfortable, financially secure retirement.
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