Pension investment guide
How should my pension be invested?
A pension is only the wrapper. What matters for growth and risk is how the money inside it is invested. The right approach depends on your time horizon, objectives, tolerance for loss and how the pension will eventually be used.
Workplace pensions
Many people are invested in a default fund.
MoneyHelper explains that workplace pension schemes normally provide a default investment fund for members who do not make an active investment choice.
Default funds are designed for a broad group of members rather than for your individual retirement plan. They can be entirely appropriate, but it is worth understanding what the fund is trying to do and how much risk it takes.
The default still has an asset mix, a level of risk and often a planned approach to reducing or changing risk as retirement approaches.
Investment risk
Higher expected returns usually come with greater uncertainty.
Investments with greater long-term growth potential can also experience larger falls in value. Lower-risk assets can reduce volatility but may offer lower expected returns and can still lose purchasing power after inflation.
Capacity for loss
How much could the pension fall without materially damaging the retirement plan?
Attitude to risk
How comfortable are you with investment values moving up and down?
Time horizon
A pension not needed for many years can generally tolerate more short-term volatility than money needed soon.
Withdrawal need
A pension that will be drawn from regularly needs to consider the risk of selling investments after market falls.
Diversification
Do not rely on one market, sector or asset type.
Diversification means spreading investment exposure so the pension is not dependent on one company, country, sector or asset class.
A diversified pension portfolio can still fall in value, but the aim is to reduce concentration risk and avoid one area dominating the outcome.
It is a risk-management tool, not a promise that the portfolio will rise when markets fall.
Approaching retirement
The right investment strategy depends on what you plan to do with the pension.
Some pension defaults automatically reduce investment risk as the selected retirement age approaches. This can be sensible if the pension will be used in the way the strategy expects.
But someone planning to remain invested through drawdown may have a different time horizon from someone intending to buy an annuity or withdraw most of the pension at retirement.
If an old plan thinks you are retiring at 60 but you intend to stay invested until 70, its automatic investment changes may no longer fit your plan.
After retirement
Investment decisions do not necessarily stop when withdrawals begin.
In flexi-access drawdown, the remaining pension stays invested while withdrawals are taken. This introduces sequence-of-returns risk: poor returns early in retirement, combined with withdrawals, can have a disproportionately damaging effect on how long the fund lasts.
Cash for near-term spending
Holding some planned withdrawals away from more volatile assets can reduce the need to sell after a market fall.
Growth for later years
Money not needed for many years may still need enough growth potential to help offset inflation.
Regular review
A pension investment strategy should change when the plan changes.
Retirement date
Has the expected retirement age moved earlier or later?
Withdrawal method
Are you planning drawdown, annuity purchase, lump sums or a combination?
Other income
State Pension and defined benefit income can change how much risk the defined contribution pension needs to carry.
Fund charges
Costs reduce returns and should be considered alongside investment design.
Risk tolerance
Your willingness and ability to accept losses can change over time.
Diversification
Market movements can change the portfolio mix, so exposures should be reviewed rather than assumed to remain balanced.
Pension investment advice
Not sure whether your current pension investments still fit the plan?
A personal review can consider risk, diversification, charges, retirement timing and how the pension will eventually be used.
Book a conversationThis guide is for general information only and is not personal financial or investment advice. Investments can fall as well as rise and you may get back less than invested. Past performance is not a reliable indicator of future results.