Pension Investment: Maximizing Your Retirement Savings

Investing in a pension scheme is a way to accumulate a sum of money that can be used as a source of income during retirement. However, choosing the right investment options can be a daunting task for pension scheme members. Depending on the type of pension scheme and whether it is provided by an employer or privately set up, investment choices may vary.

Alistair McQueen, head of savings and retirement at Aviva, reassures pension scheme members that they have the flexibility to change their investment choices at any time without incurring any costs. This should help alleviate any concerns about where to start. In this article, we will explore the different types of pension schemes and investment options available to help pension scheme members make informed decisions about their retirement planning.

Defined Benefit Pensions

Members of defined benefit, final salary, or career average pension schemes are not responsible for investment decisions affecting their plans. These schemes are managed by professional investment teams. However, plan members may need to make choices about their plan, such as making additional voluntary contributions to boost their pension savings. Unlike defined contribution pension schemes, the retirement income for defined benefit pension schemes is based on a formula that factors in the employee’s salary and years of service. This provides a guaranteed income for life, which can be beneficial for retirees who want a secure and predictable retirement income.

Defined Contribution Pensions

Defined contribution pensions are retirement savings plans that allow individuals and/or employers to contribute to a fund that generates a retirement income. Unlike defined benefit pensions, which guarantee a specific retirement income, the amount of retirement income generated by a defined contribution pension depends on the amount contributed and the growth of those contributions. Members of such arrangements are often required to make active decisions about how their contributions are invested, with contributions usually being channelled into investment funds. These funds can invest in a variety of assets, including shares, bonds, property, or cash.

Workplace Pensions

After joining a workplace pension, an employee’s contributions are usually invested automatically by the plan’s administrator, typically an insurance company. The scheme chooses a vehicle known as the ‘default’ fund to meet the investment needs of its members. If an individual is content with this fund choice, often referred to as a ‘lifestyle’ or ‘target date’ fund, then he or she need not do anything more than continue contributing.

However, experts advise employees not to accept the pension scheme default option as the right investment choice for them. Tom Evans, Managing Director, Retirement, at Canada Life, suggests making a conscious decision about where to invest based on the individual’s attitude to risk and the time until retirement. Investing for the long-term, perhaps 20 years or more, means that the ups and downs of stock markets will be smoothed, and history shows that better returns are likely than simply saving into cash.

Dean Butler, Managing Director for Retail Direct at Standard Life, suggests that most people who start saving into a pension are auto-enrolled into their workplace pension’s default investment option, and this can be a good choice for some, but not everyone. He advises considering how much involvement an individual would like with their investments. If they are not an investment expert or too busy to manage their investments themselves, a ‘ready-made’ option could be suitable. These options are designed for ease and start by investing in funds that aim to increase the value of the pension pot over the long term. As an individual gets closer to retirement, the funds gradually and automatically move into carefully selected funds designed to reflect how they plan to take their pension, all without them needing to do anything.

In summary, it is important to make an informed decision about where to invest in a workplace pension. Considering the individual’s attitude to risk, time until retirement, and desired level of involvement in investments can help them make the best decision. Ready-made options can be a good choice for those who are not investment experts or too busy to manage their investments themselves.

Investment Choices

Most workplace pensions offer a range of investment options for their members. It is important to consider these options to find the best fit for individual circumstances. Some funds offer higher growth potential but come with greater investment risks. This means that pension pots may experience more volatility in value over time, resulting in steeper peaks and troughs in performance.

If the pension is being held for the long-term (at least 10 years), it may be beneficial to accept the extra volatility in performance if the returns achieved at the end of the plan’s life compensate for the bumpier ride.

Each fund option should be backed by a fund factsheet, which presents information about the financial objectives of each fund and the underlying investments into which the fund is invested. The factsheet will also indicate the risk associated with each fund. Higher risk funds have the potential to drive higher returns over the longer-term, but they may also come with greater volatility. Lower risk funds may carry less volatility, but this may result in lower longer-term returns.

Investors may also have the option to choose funds with a more ethical or socially responsible bias, or Sharia-compliant funds that invest in accordance with Islamic law.

Investors who initially choose a default fund may have the opportunity to change their investment choices later.

Self-Invested Personal Pensions

Investment decisions are crucial for those who choose to manage their own pensions. Self-invested personal pension providers and online investment platforms offer a variety of investment options and may provide assistance with fund selection. However, the range of options and level of support can vary significantly between providers.

Some providers offer a limited selection of funds and straightforward investing options, while others provide a more extensive range of funds and risk-based tools to help investors narrow down their selections. It is important to note that pension providers must supply specific information to potential investors to help them make informed decisions. This information includes details on how the fund is invested, the returns the fund has achieved, the fund charges, and the risks involved.

Understanding investment risk is crucial when choosing investments. It is essential to consider how much risk one is comfortable taking and able to take with their money. For most people, it is recommended to diversify their investments across a mix of investment types, such as equities and bonds, and across different countries. This strategy helps to spread the risk and ensures that if things go badly in one particular country or investment type, not all of the invested money will be affected.

In summary, self-invested personal pensions offer a range of investment options, and it is important to carefully consider the level of support and range of options offered by different providers. Understanding investment risk and diversifying investments can help to manage risk and ensure a well-rounded investment portfolio.

Key Considerations

When it comes to investing in a pension plan, there are several key considerations that individuals should keep in mind. These include the length of time the pension will be invested, inflation, risk, the need to diversify between different types of investment, fees and charges, and monitoring and reviewing investments.

It is important to keep pension investment options under review. This need not be on a daily basis, but maybe once a year. As individuals approach retirement, they may want to consider moving their investments towards lower risk options. This is to minimize the impact of any big swings in the value of their investments, just as they are about to access their money.

If individuals are unsure where to begin, they should not be afraid to ask for help. Their pension provider should offer a range of information. And if they want personalized help, they may want to consider paying for a professional financial adviser.

Individuals should also check if there are any pension pots from their past employment that they may have forgotten about. With more than £26 billion currently sitting unclaimed in pots held with people’s previous employers, consolidating workplace pensions could uncover savings they didn’t know they had, as well as making it easier to manage this money.

Most of the largest pension providers now have a mobile app that individuals can use to keep track of their pension’s performance. Some of the better apps even allow individuals to make changes such as consolidating those workplace pension pots and to forecast their retirement income depending on when they access the money.

According to a recent survey by Hargreaves Lansdown, about one in three (30%) respondents said they wished they had paid closer attention to their pension requirements.

Making sure individuals have enough income in retirement is one of the biggest challenges facing investors. One in 10 retirees say they regret not looking more closely at their investments while saving, with a further 22% wishing that they had got to grips with pension saving earlier.

Cash may be a good idea for rainy-day savings, but for retirement, individuals need to be invested. The power of compound interest and time in the market means the earlier they start, the easier it is to grow a sizeable pension pot.

Where an individual decides to invest depends on where that person is in their retirement journey. As individuals near pension age, they should prioritize capital preservation and look to income-generating assets.

Investing for the Long-Term

Investing for retirement requires a long-term strategy. Pension scheme members typically cannot access their pension pot until age 55 or later. Therefore, it is crucial to invest the money differently from short-term savings for unexpected expenses.

Robert Cochran, a representative from Scottish Widows, emphasizes the importance of starting to save for retirement as early as possible. A pound saved in one’s 20s could have four times the value of a pound saved in one’s 50s by the time of retirement.

Alistair McQueen, from Aviva, suggests treating one’s pension as a significant financial asset and taking care of it accordingly. He advises routine maintenance to ensure a comfortable retirement.

Claire Trott, divisional director at St. James’s Place, recommends keeping track of pension accounts and staying informed about pension options. She stresses the importance of nurturing pension accounts and not just making contributions and forgetting about them. Employers may offer personal advice, and the government provides resources such as MoneyHelper.

Investing for the long-term is a crucial aspect of retirement planning. Starting early and nurturing pension accounts can help ensure a comfortable retirement.