How is your pension invested, and does it matter?

If you are still working and pay into your pension passively – have your contributions removed from your take-home pay each month – you may not think too much about where the money actually goes.

What happens to the funds you put in your pension depends on:

• The type of pension you are paying into
• The provider responsible for your funds
• The choices you make about your pension.

Generally speaking, though, your pension will be invested in some way or another.

Keep reading to discover the options for investing within a pension, and why paying attention to these investment choices could help you achieve the retirement you deserve.

Your pension is usually invested in a wide range of assets

When you pay into a defined contribution (DC) pension, such as a workplace pot of self-invested personal pension (SIPP), your provider usually invests the money into a fund on your behalf.

This fund might be made up of:

• Cash
• Shares
• Property
• Commodities, like gold or oil
• Government or corporate bonds

If yours is a defined benefit (DB) pension, also known as a “career average” or “final salary” pension, these are usually invested by trustees and aren’t as accessible as DC pensions. Plus, DB pensions are a form of guaranteed income, meaning you receive payments differently than if you’re drawing from a DC pension.

When you come to retire with a DC pension, your pot’s value will be determined by:

• How much you and your employer have put in
• The tax relief you have received on your contributions
• The amount your pot’s investments have returned in total
• The ongoing fees you have paid to your pension provider(s).

For instance, if your combined contributions (including employer payments and tax relief) equalled £500,000, that won’t be how much your pot is worth exactly. The value of the assets this money has been invested in will determine how much you can take.

So, as you can see, there is some risk involved in pension investments. But as PensionBee and others have discovered through research, pension funds usually trend upwards and post positive returns, making the investment worthwhile overall for retirees.

The alternative, of course, would be to keep your retirement fund in cash. However, as you may already know, inflation typically reduces the value of your cash in real terms over the years. As such, investing within a pension is still the route we would normally recommend for pre-retirement clients.

The question now remains: should you pay attention to how your pension pots are invested?

Let’s take a closer look at the pros and cons.

2 advantages of actively choosing your pension investments

1. You may be able to align your investments with your values and goals

One of the key pros to managing your investments within your pension – by accessing your pension dashboard through your provider, for example – is the element of choice.

You might want to align the way your money is invested with your desired time frame. For example, if you’re close to retirement, this will influence how you invest compared to if you’re 30 years away.

Likewise, you may wish to explore environmental, social, and governance (ESG) options if they are available. This would involve moving your investments to a fund that only invests according to ESG guidelines, avoiding commodities like oil, for example.

2. You can manage the level of risk your pension is exposed to

Risk is a huge factor when you’re investing within a pension.

Take on too little risk for your circumstances and your pension may not grow in the way you expect. But taking on high-risk investment close to your retirement could make your fund vulnerable to downturns at the point you want to draw from it.

Read more: Should you de-risk your pension in run-up to retirement?

2 potential downsides of being an active pension investor

1. Over-managing your investments could result in undesirable outcomes

If you tend to become anxious when markets dip, or find you can be obsessive about money management, paying close attention to your pension investments could become an unhelpful exercise.

While it’s useful to check in with the value of your pensions once a quarter at the most, analysing market conditions constantly could lead you to make short-sighted decisions, such as panic-selling shares or moving your investments to a different fund.

Both these actions may result in losses that have a detrimental effect on the value of your pension.

So, it’s important to keep a balanced mindset and focus on your goals. If you are concerned about the value of your pension dipping and affecting how much you can draw, speak to a financial planner for a bespoke retirement plan.

2. You may not have the time to thoroughly assess your options

As a hardworking professional, it’s hard enough keeping track of your day-to-day responsibilities, let alone being an active manager of all your investments, including those in your pension.

If you want to make the right choice for you when analysing your pension investment options, it may be constructive to seek the support of a qualified professional.

At Kellands, we always take a bespoke approach – meaning that all the advice we give is tailored specifically to you. At every stage, we will explain why we make certain recommendations and have excluded others, based on your personal situation and the goals you have for the future.

Get in touch

If you are pre-retirement and are beginning to pay close attention to your pension(s), get in touch to learn about how we can help.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

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