Sponsored by
The pension risk pick-and-mix
NVESTING the money you save into a pension scheme requires careful thought and advice.
The investment decisions you make can have a significant impact on the size of your pension in retirement, but it need not be as daunting as it sounds.
If you can gain an extra one per cent return a year, over a 20 to 30 year period, then with the power of compounding interest this could increase the value of your pension pot considerably.
If you are in an defined benefit occupational scheme, the chances are all your investment decisions are made for you, but for those of us with money purchase and personal pension plans, the burden is on our shoulders.
Mercy
You therefore need to carefully consider the risk and reward involved to ensure it suits your objectives.
The range of options offered by pension providers is widening.
Many providers not only offer a small number of their own funds, but also now link up with external fund managers to offer third party funds as well.
I see a number of people who have kept all their pension pot in just one fund. This means their future retirement lifestyle is solely at the mercy of just one fund manager.
It could also be considered a riskier pension to be concentrated in just one fund.
A more balanced approach is to choose a few funds from the varying asset classes and blend these together to match your investment goals.
The investment decisions you need to make, in conjunction with your adviser, is how you mix the four main asset classes – equities, property, bonds and/or cash – to maximise growth.
Equities have been the highest returning asset over the long-term, but are also the most risky, with the largest movements in price, particularly when measured over the short term.
Equity funds can also be broken down further, for example between UK-based funds, USA-based funds, European funds and the emerging markets.
Property can also fluctuate as demand is affected by the ability of companies to buy or rent premises.
Bonds tend to be less volatile but are influenced by interest rates and, therefore, also move up and down.
Downturn
Cash is the safest asset class, as your capital is secure, but it does not protect against inflation. There is no chance of any capital gain and income fluctuates with interest rates.
Long-term, therefore, it is common to put a greater proportion in equities, to maximise the growth potential, but to move slowly into more secure assets as retirement approaches.
This ensures that any gains you make are ‘locked’ in, removing the risk that your pension will eaten up by any last minute downturn in markets.
It is important to carefully consider the trade-off between risk and reward.
Putting all your money in one asset class will mean if that asset does badly, the whole fund will suffer.
Avoid chasing attractive looking performance as there is always a risk it will fall.
By that same token, don’t be too cautious, particularly if you are starting early, as this could mean missing out on investment growth and your pension ends up just a fraction of what it could have been.
Email to a friend
Print this page
Looking for...
Featured advertisers
Jobs
Search for a job
Motors
Search for a car
Property
Search for a house
Weather for Leeds
Saturday 11 February 2012
Today
Cloudy
Temperature: -1 C to 1 C
Wind Speed: 9 mph
Wind direction: South east
Tomorrow
Light rain
Temperature: 1 C to 6 C
Wind Speed: 8 mph
Wind direction: North west
