The investments held within your pension scheme are probably one of the most important, after the purchase of your home. This pension fund will be responsible for giving you financial security in your retirement and should be granted the time and respect it is due. You should be asking yourself the following questions:
- How often are you reviewing your pension investment funds?
- Are you happy with the funds’ performance to date?
- Do you know the reason for any falls in value?
- What are you expecting from your pension? Is it on target?
- Is the pension suitable for your needs?
These questions stem from the age-old risk/reward relationship that is the cornerstone of investment planning. Discussing your feelings and expectations from your investments will provide you and your adviser with invaluable information about the type of investor you are.
When creating a portfolio, investment managers will generally recommend a portfolio containing a mixture of asset types. The four main asset classes are equities, fixed interest, property (commercial rather than residential) and cash. It is most important, when investing, not to have too many eggs in the same basket.
Different types of investment react differently to different economic and political circumstances. The best way of smoothing out the risks of investment is to spread holdings between different types of assets which will not all move in the same direction at the same time. Most types of investment prices are affected in different ways depending on economic or other events that may occur globally so you can see how spreading money across a range of investments is useful. This is even more important if you are drawing income from your pension fund.
Generally speaking, the higher the risk taken, the higher the potential reward. However, bearing in mind the recent investment crash as a result of the Covid-19 pandemic, it is possible for investments and pension funds to fall, regardless of the risk strategy selected. The length of time until you intend to take benefits and the way in which this is structured is very important when deciding a strategy.
If you start saving for your pension from an early age, including more equities in your portfolio can be very beneficial in providing good prospects for growth over the long period until retirement. Equities can be volatile in nature but the effects of volatile markets are generally short term and so over a longer period tend not to have too much of an effect. It is important though to look at the investments as you move closer to retirement age and deciding how to take benefits. With the new rules allowing for some pensions to remain invested indefinitely, it may be appropriate for the strategy to continue for the longer term.
If you have less time until retirement it could be unsuitable to remain invested heavily in equities, it may be sensible to reduce this and include more low risk assets.
Many pension investors do not realise the importance of reviewing their investments regularly, but regular reviews of your pension portfolio are extremely important. Having your pension reviewed professionally is an opportunity for you to discuss any changes in circumstances, thoughts towards your investment and future plans which all may have an impact on the suitability of the strategy you have in place. If you are unhappy with the performance, this is your opportunity to discuss it with your adviser and implement any changes necessary. Better to make changes early so that you remain comfortable with your investments, than to let them continue and be sorry later on. Communication is the key here and it enables you to retain control of your investments and your financial future.