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Understanding how your pension is invested is one of the most important steps in planning for retirement. In Episode 6 of the Retire Well with Wealth of Advice podcast, Chartered Financial Planners Joe and Matthew discuss the range of investment options available within pensions, how risk and reward work, and common misconceptions about retirement planning.
Many people are unsure how their pension funds are invested. According to the FCA, over nine in ten people remain in the default investment option in their workplace pension. While default funds are designed to suit the majority, research shows that around 45% of these funds fail to outperform their benchmarks, which may limit long-term growth.
Joe adds that understanding your pension investments is key to achieving the retirement lifestyle you want.
Pension funds invest in a range of underlying assets.. The main types include:
• Low risk and very liquid
• Offers limited growth, often just keeping pace with inflation
• A way for governments or large companies to raise money
• Pays a fixed interest over time
• Steadier than equities and generally less risky
• Shares in companies, providing potential for higher returns
• More volatile than bonds or cash
• Suitable for long-term growth
• Includes assets such as commercial property and precious metals like gold
• Allows access to markets that retail investors cannot invest in directly
• Adds diversification to your portfolio
Pension funds are often structured with a 60/40 split, meaning 60% in equities and 40% in bonds or fixed interest. This balance aims to provide growth while controlling risk.
• Automatically adjust the investment mix as you approach retirement
• May reduce exposure to riskier assets over time
• Not always suitable if you want to take a flexible income or retire earlier than your normal pension age
Joe and Matthew caution that it is important to check if your pension’s lifestyle fund aligns with your personal retirement plans.
Every investment carries some level of risk, and higher potential returns usually come with greater volatility. Understanding your risk tolerance and time horizon is crucial:
• Longer-term investors can typically take more risk, as there is time to recover from market fluctuations
• Shorter-term or near-retirement investors often prioritise capital preservation over growth
By reviewing your investment options, you can ensure your pension aligns with your retirement goals and personal comfort with risk.
A common misconception is that you can only retire at your Normal Pension Age (NPA). Often, a NPA on your pension is just used for illustrative purposes. Depending on the scheme you could access your benefits from age 55.
Understanding your pension investments is essential for achieving the retirement lifestyle you want. At Wealth of Advice, our Chartered Financial Planners can help you review your investment options, assess risk, and ensure your pension strategy is aligned with your goals.
Explore our free guides, blog posts, and tools to take control of your pension investments today.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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