By Rachel Wait
Nearly half of Brits have no idea about their pension investments and are unsure where their money is invested, according to research by Barings Asset Management.
But this lack of knowledge about pension investments is a big mistake because ultimately where you invest your pension will influence how much you have in your pension pot when you come to retire. So here are ten golden rules for investing in a pension.
1. Match it to your attitude to risk
Where you choose to invest your money will depend on how much risk you're prepared to take. You need to find a balance between the amount of risk you want to take and the potential return you're likely to make. Riskier investments have the potential to provide greater returns, while those that are less risky won't offer as much. But take too much of a risk and you could lose out.
If you are a long way off your retirement date, you might want to consider taking more risk with your investments because you'll have longer for your investments to grow – and even if your investments take a dip, there's plenty of time for them to recover. In contrast, as you get closer to retirement, you'll probably want to reduce the amount of risk you take.
Remember you should only choose the amount of risk you are comfortable with.
2. Spread out your investments
A key rule to investing is not to put all of your eggs in one basket. In other words, ensure you diversify your investments. You want to ensure you are gaining exposure to different types of assets (bonds, equities, property, commodities and cash) so that your portfolio is balanced.
You should also ensure you're not only investing in one sector. It's not wise to invest only in the UK, for example, because should the UK stock market collapse, you have nothing to fall back on.
3. Don't jump on the bandwagon
Be careful not to simply jump on the latest bandwagon. As we have already witnessed with the dotcom crash, bubbles can burst and if you've been too hasty and invested all of your money in the latest 'craze', you could seriously lose out. Also, it's a sad fact that ordinary investors too often catch the wave of the latest trend just as it's about to dip.
4. Review your plan regularly
Even if you've done all of the above, it's vital that you review your plan regularly to ensure your funds are performing as you'd hoped. It's a good idea to check them at least once a year and if you're not happy with a particular investment fund, move your money elsewhere (check if there are any penalties for doing so first).
5. Don't panic sell
Having said that, don't panic sell. When share prices start to fall significantly, the temptation is to sell immediately. But you need to stop and think about whether this is likely to be a temporary blip. Is the fund generally a good performer? Does it have solid future prospects? Will you lose a lot of money if you sell now? If you're still some way off retirement, there's plenty of time for your investment to recover. So resist the urge to panic sell and think about your decision carefully.
6. Invest for the long-term
This leads me nicely onto remembering that saving for your retirement should be a long-term investment. Don't expect to be making stacks of money overnight. Remember that the value of your investment can go down as well as up, but providing you're still some way off retirement, there's still time for it to make its way up again.
7. Don't invest in the default option
All money purchase or defined contribution pension schemes offer a default option fund and this is where your money will be invested if you don't choose your own investment funds. However, it's also often a very middle-of-the-road option and may not be suitable for you or produce particularly good returns.
Of course, in some cases, the default option can perform well, but it's important you take a look at whether it meets your investment objectives and whether it has performed strongly over the years before deciding whether to keep your money there. If it's not what you're looking for, go elsewhere.
8. Avoid index-trackers
If you want to beat the market, it's worth avoiding index-trackers. Index-tracking means you invest in all the company shares quoted in a particular index. The aim is that it replicates how the index performs. So if you were to put your money in a FTSE 100 index-tracking fund, you would be investing in all of the top 100 UK companies and it would try to mimic the performance of the FTSE 100.
However, the problem is that they are only designed to match market returns. So if you were to invest in a FTSE 100 index-tracking fund, it won't outperform the FTSE 100 and will probably have slightly lower returns, allowing for charges and the fact you miss out on dividends from the companies quoted on the market. Tracker funds also don't allow you to have the flexibility to avoid shares or sectors that might be going through a bad patch.
By going for a top-performing actively managed fund instead, there's potential for investors to beat the market. Here, investments are chosen by professional fund managers who constantly monitor companies and markets. However, it's important to pick strong funds with respected fund managers and a good performance track record if you're going down this route – run-of-the-mill managers don't usually beat the index. And remember that a solid past performance doesn't automatically mean it will perform well in the future.
9. Consider lower risk assets near retirement
As you approach retirement, it's well worth reducing your exposure to shares and moving your pension out of shares and into lower risk assets such as bonds and cash. That way you will be more protected from falls in the stock market which could make a serious dent in your pension pot.
10. Get advice
Finally, don't fumble around in the dark. If you're unsure about what you're investing in or should be investing in, don't be afraid to seek advice from an independent financial adviser. It should be well worth while.
