Investing to achieve the future life that you dream of doesn’t have to be complicated. All that most people really need are a defined contribution pension and a stocks and shares ISA.
Where it can feel really confusing is choosing your investments, particularly when it comes to your workplace pension.
Lifestyling – the default
By law, employers have to provide their employees with a defined contribution workplace pension. Since autoenrollment was introduced in 2015 you automatically have a workplace pension unless you decide to opt out. Please don’t.
This workplace pension is provided by a 3rd party company such as Aviva., Legal&General, Fidelity and Nest.
Your employer plays no part whatsoever in the management of the investments in your workplace pension.
All they do is ensure that yours and their contributions are sent to your pension provider correctly each month. That’s it.
Unless you choose otherwise, your workplace pension will be invested in your providers default fund.
This default is called lifestyling or something close to this term.
You should instead be making an active choice. You might be better off choosing your own investments to ensure that your money works as hard for you as it possibly can for your future.
Access your workplace pension
Hopefully you already regularly monitor the amount in your workplace pension. At a very minimum once a year. But sadly many people don’t even think about how much they have until they start to think about their retirement date let alone regularly check on how it’s doing.
The first thing you might need to do is to figure out how to access your workplace pension.
If you work for a large company then there is likely to be a link on your company intranet page – perhaps under a category such as reward.
For smaller companies, maybe you don’t have a company intranet page and instead you need to access your workplace pension providers site directly.
If you have lost the email or paperwork with your login details then contact your company payroll and they should be able to help – or at least point you in the right direction.
Your provider may also offer a mobile phone app for more convenient monitoring of your investments, however in these cases you
The Information You Need
Pension providers vary in the funds they have available.
So the first thing you will need to request from your provider is the list of available funds. If it’s one of the larger providers then this information will be available on your pension online portal.
The other key piece of information that the provider will hold is your retirement date and your beneficiaries.
Because your DC fund falls outside your estate for inheritance tax purposes – so can be bequeathed free of tax, make sure that you have listed your chosen beneficiaries.
The retirement date is likely to have been chosen for you. Perhaps it’s linked to your state pension age but not necessarily. There is no fixed retirement date.
You can retire whenever you want but this date becomes really important if you are in the lifestyling default because your portfolio will be gradually derisked in the run up to this age. And this might not be right for you – as I said, I’ve covered lifestyling in more detail in the previous video that’s linked in the description.
I’ve worked with many clients who are close to retirement and wished that they had moved their pensions out of lifestyling years ago.
The Choice of Funds
The choice of funds offered by your pension provider can vary hugely. It may be as low as 10 or fewer or could be hundreds.
The funds are likely to be grouped together in some way.
Perhaps they are grouped by the types of assets contained within or by risk level or both.
So you could have funds that are equities or company stocks only
Some might be bonds or fixed income only
Others might have commodities.
And you will also likely see geographic categories – for example UK only equity, US only equities or perhaps your provider has a global equity fund
And then there might be the industry sector grouping – for example a technology only fund.
How to choose a mix that’s right for you – the risk level
The first thing you need to decide is the risk level you are comfortable with.
This can be quite difficult to decide because what you think you are able to tolerate can be very different to the reality of watching your portfolio drop by 20% in a bear market.
And how you will feel about a drop like this will be very different if you are 30 years old and are several decades away from retiring compared with if you are just about to or already retired.
So your risk appetite might indeed change as you get older.
Remember that to get the highest returns, you have to have the highest risk portfolio. On the other hand, when you get to the point that your portfolio has grown to the amount that you need for retirement, you are no longer interested in further growth as you were before and instead want to limit volatility.
There’s a lot to think about.
When you do have as clear an idea of possible of what level of risk you want for your pension investments, it’s helpfulI to divide the risk levels these 4 categories, which are conservative, balanced or moderate, aggressive or growth and finally very aggressive or high-risk.
Let’s go through the asset class mix that each of these portfolios typically have.
Conservative Portfolio:
- Predominantly allocated to fixed-income securities such as bonds.
- A smaller portion allocated to stable dividend-paying stocks or other conservative investments.
- Equities: 10-30%
- Fixed Income: 60-80%
- Cash or Cash Equivalents: 5-10%
- This portfolio aims for capital preservation and income generation, with a heavier emphasis on bonds.
Balanced or Moderate Portfolio:
- Equities: 40-60%
- Fixed Income: 30-50%
- Cash or Cash Equivalents: 5-10%
- A balanced mix of equities and fixed-income securities.
- This portfolio seeks a balance between capital growth and income generation
Aggressive or Growth Portfolio:
- Equities: 60-80%
- Fixed Income: 10-30%
- Cash or Cash Equivalents: 5-10%
- This portfolio aims for higher capital appreciation with a higher allocation to stocks.
Very Aggressive or High-Risk Portfolio:
- Equities: 80-100%
- Fixed Income: 0-20%
- Cash or Cash Equivalents: 0-5%
- This portfolio is geared towards maximizing growth and accepts higher volatility and risk.
- Predominantly invested in high-risk, high-reward assets such as small-cap stocks, emerging market equities, and potentially alternative investments.
- Limited exposure to fixed-income securities.
Your provider might rate the risk each of the funds in these terms or may have their own risk scale, typically 1 to 7, with 1 being the lowest risk and 7 being the highest.
You might also have to read the detailed information in the funds to find the exact risk level.
Select the mix of funds that give you the overall risk level that you are comfortable with.