Pension Investment Choice
The success of your pension investments could have a major impact on your retirement income. Small changes to your annual investment return, as well as inflation, can
make a big difference - just take a look at the examples below:
|How Investment Returns Can Affect Your Retirement Income
|Annual Investment Return
||Annual Retirement Income
|Annual Retirement Income
|Assumes a £100 monthly saving over 40 years, tax-free growth and the whole fund buys an annuity at 5%. Figure's shown in today's
This is why you shouldn't neglect how your pension is invested, unless you have a final salary pension in which case it's your employer's problem!
Your aim should be to combine several investment types (don't pin your hopes on just one in case it backfires) that suit the level of risk you're comfortable taking and
the length of time until you take your pension.
To appreciate how your pension is invested you need to understand the main investment types, including their potential benefits and risks involved.
For a comprehensive explanation please read the Candid Money guide to investing, else take a look at the brief overview below.
The equivalent of having a bank savings account in your pension. Safe, but returns are unlikely to be that attractive over many years.
It's where you should be invested in the few years before taking your pension to ensure a financial crash doesn't hit your pension pot.
The range of funds available depends on the provider. At best you should be able to access all the investment types outlined above, at worst just two or three. Common types
of fund include:
These funds usually (but not always, so check!) invest in two or more investment types. You'll often find them called cautious, balanced and adventurous (or something along
which should indicate towards which end of the above investment diagram the fund is biased. They can offer a simple low-hassle approach to investing, but check how widely the
fund invests (e.g. is it restricted to just UK shares and gilts, or is it a comprehensive mix of global shares, bonds and property) and the fund manager's track record.
Occupational Money Purchase Funds
Your options are likely to be very similar to those within a stakeholder pension.
The investment world is your oyster, well nearly. You can invest in any of the investment types outlined above and other more specialist areas too. You'll also have the
choice of whether to invest via funds or by buying shares or bonds etc. directly.
Your biggest problem is likely to be the overwhelming choice of investments on offer, it can make deciding what to buy seem a herculean task.
Despite the choice, don't lose sight of your investment objectives. Make sure your chosen investments are suitable to the level of risk you're comfortable taking and, if
actively managed funds, are run by a decent manager.
How do I check a fund manager's track record?
If you're buying a non-tracker investment fund the performance will, to some extent, depend on the skill (and luck?) of the manager running the fund. Their job is to decide
what shares, bonds or other types of investment to buy as they try to deliver a better return than a comparable index.
After all, if they can't beat the index then why bother investing with them? You'd buy a tracker instead.
The difficulty is picking those likely to be successful from those who'll underperform the index (of which there are many!).
There is no sure fire method, but the following should improve your chances of picking a winner:
Past performanceResearch ratingsFunds Held
Just because a manager has performed well in the past it doesn't mean they will in future. However, if they've consistently performed well it suggests they're probably more
skilful than a manager who's consistently performed badly.
The key is to look at year by year performance (called 'discrete' performance), not a simple three or five year figure. You should then compare this to a suitable index to
see if, and by how much, the manager beat it.
Pension Investment Jargon
Here's some of the more common pension investment jargon you might come across: