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A pension is something many of us sign up for and then forget about, but failing to get to grips with where your retirement savings are invested could prove an expensive mistake.
If your money hasn’t been working as hard as it possibly can for you, your pension pot might not end up quite as big as you’d hoped.
Despite this risk, nearly three out of four of us (74%) have no idea where our pension is invested, according to research by investment service Hargreaves Lansdown. This also often means we don’t know how much our pension pots are worth, or when we might be able to afford to retire.
A spokesman for Hargreaves Lansdown said: “Only a quarter of people know how their pension is invested. Those that know about their investments are more likely to have their retirement ducks in a row. They’re twice as likely to know the current value of their pensions, what options they have available to them at retirement, and how much they’ll need to retire on.”
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
What is a default fund?
Unless you’ve specified that you want your retirement savings to be invested in a particular fund or funds, most pension savers have their contributions automatically invested into a one-size-fits all ‘default fund’.
The default fund typically uses a process known as lifestyling toautomatically change where your pension savings are invested as you approach retirement. When you’re a long way off retirement, for example, your money will go into a fund invested in a broad mix of investments, but predominantly shares, with the aim of growing your pension pot.
As you start to approach retirement, usually when you’re in your mid to late forties or early fifties, your savings will gradually be moved into less risky investments, such as gilts (which are government bonds) and cash. This is to reduce the risk of your pension suddenly plummeting in value just before you retire, which might happen if there was a sudden stock market crash and all your money was in shares.
Why the default fund may not be the best option
With many of us working for longer and choosing to leave our pension savings invested in retirement so we can take an income through drawdown, moving into lower-risk investments too early may not always be the best option. This is because you could still have decades in which your pension needs to remain invested and grow.
Historically, shares have delivered higher returns than cash and gilts over longer periods, although they also come with greater risk and can fall sharply in value. Research based on the Barclays Equity Gilt Study shows that, between 1994 and 2024, UK equities delivered an average annual real return of 4.55%, compared with 1.56% for gilts and 0.69% for cash. A real return is the return after inflation has been taken into account.
This doesn’t mean you should simply leave your pension invested entirely in shares. Having some lower-risk investments can help protect part of your pension from market falls, particularly once you start taking an income. But moving too much of your pension into cash or bonds simply because you have reached retirement could limit its potential to grow and may increase the risk that your money doesn’t last as long as you need it to.
For example, imagine two people both retire with £200,000 in their pension. One moves most of their money into cash and lower-risk investments because they believe they need to protect their pension from stock market falls. The other keeps a diversified portfolio with some exposure to shares because they expect to remain invested for another 20 years.
If markets perform strongly over that period, the second person’s pension could grow considerably more, although they would also have to accept greater fluctuations and the possibility of losses along the way. Conversely, if markets fall sharply, the person with more exposure to shares could see their pension fall significantly in value.
The important point is that there is no single ‘right’ investment strategy for everyone in retirement. Your approach should reflect how long you expect your pension to last, how much income you need to take, how much investment risk you can tolerate and whether you have other sources of income, such as the State Pension.
How to choose the right pension fund for you
If you’re intending to invest throughout your retirement, using drawdown to take an income from your pension as and when you need it, you might be comfortable taking on more risk, as your investment horizon will be longer.
If, however, you’re planning to use your pension to buy an annuity, or income for life, when you stop work, you may prefer to stick with the default fund, or another lower risk option. This can provide you with peace of mind that the value of your savings won’t suddenly fall just before you need them.
Ask your pension provider which funds you can invest in. They should provide you with information about all the options available to you. You can find more detailed information in each fund’s Key Investor Information Document (KIID). These are usually available online, or your pension provider should be able to give you a copy. The KIID explains the fund’s investment objectives, charges and other information.
You’ll usually be able to choose from cautious, balanced or more adventurous options, so you can find a fund which matches your appetite for risk. Remember to take charges into account too, as the higher they are, the more they’ll eat into your investment returns.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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