Pension Planning - How Money Is Invested

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How Money Is Invested

With all defined contribution schemes, stakeholder schemes, personal pensions, retirement annuity contracts and occupational money purchase schemes, everything that is paid into the scheme is invested. With most schemes, you invest in one or more funds run by professional fund managers. How well the invested contributions grow is the single most important factor that determines how much pension you will get. However, is something that cannot be predicted.

You might be tempted to put your money in funds that have done well in the past. However, numerous studies show that past performance is not a good guide. Especially when considering long-term investments like pensions, there is no correlation between the star funds of the past and the funds, which do well today.

Similarly, there is no evidence that the funds that do well today will be the stars of the future.

Guides to help to invest your pension fund:

• Risk
  It is a fundamental pre-requisite of investment that to get higher returns you must take on extra risk. Different funds expose you to different levels of risk and therefore you should ask yourself; what level of risk, you happy to take.
• Charges
  Although investment performance will far outweigh the effect of charges, a fund with high charges will obviously have to perform better to compete with a fund with low charges. If you choose a high-charging fund, make sure that the extra costs are justified. o Consistent performance There is currently no strong evidence that suggests funds which perform consistently well now will do so in the future, but common sense suggests that you might do well to avoid consistent bad performers.

The main types of investment fund you can choose from are outlined below. Not all schemes will offer all choices, so if you want a wide choice you will need to shop around.

Most pension schemes let you invest in more than one fund if you want to and let you switch your contributions and the fund you have built up so far from one fund to another.

However, be wary of minimum investment levels for some funds and for charges if you switch.