Pension planning considerations

Looking ahead to retirement probably means you’ll need to think about a different pattern of spending as part of your pension planning considerations. Pensions usually form the cornerstone of your retirement income and understanding how to set up and structure your pension fund, with the right combination of assets, can help you build a useful revenue stream for later years. Whatever type of pension you choose, you will need to decide how to invest the money you’re saving into it.

What is a pension asset allocation?

Although asset allocation might seem a rather technical financial term, its concept is simple. It refers to how you choose to allocate stocks, shares, bonds, cash and other investments inside your pension pot – consider it as how you’d choose to slice up your pot into different segments.

So, with asset allocation you opt to divide up your pension pot into different asset classes. You might prefer to hold 50% stocks and shares, 35% bonds and 15% cash assets to help you achieve your pension saving goals. It’s worth noting that you’re likely to alter your asset allocation preferences as your circumstances change; for example, as you near retirement you may want to shift more of your pot into lower-risk options such as cash.

Asset allocation is an important topic to grasp as it can help you to future-proof your pension funds. Different types of investments vary in how they perform, and over what time frame. So, by spreading the assets you can help protect against loss and give your pension pot every chance to increase in value over the long-term. In short you won’t have all your eggs in one basket!

Asset allocation and diversification go hand in hand too. Whilst asset allocation defines how you’re splitting up your investments, diversification spreads the risk within each category. So, within your 50% stocks and shares profile you might opt for just one or two funds – and that means very little diversification. Choosing a range of stocks from different sectors and industries creates much more diversification, and again gives greater scope for you to build the value of your pension pot. Diversification can be achieved in other ways too – usually with mutual funds or exchange-traded funds (ETFs) which track fund indexes like the FTSE 100.

As a fundamental part of retirement planning and investing, asset allocation is a useful element to understand, even though it’s likely you’ll choose to entrust the management of your pension to your financial adviser and their preferred fund managers.

Pensions and investments

Ultimately, you’ll want your pension to work as hard for you as it possibly can. Undeniably the main focus of putting money into a pension is to see it grow into a larger amount. In the quest for financial freedom, your pension contributions, and the way they perform over time will have the biggest impact on the amount you’ll have available as an income for your retirement.

Pension investment options

The majority of pension plans allow you to choose from a range of investment funds in line with your preferences for asset allocation. Each fund is designed to invest your pension savings in different ways until you retire. Working with your financial adviser you can choose whether you want to pick one fund or spread your pension across a range of funds. The fund managers then make the decision about which specific investments the fund finances.

Lots of pension plans are built around the concept of a ‘lifestyle’ or ‘target date’ fund. This means that your pot is invested in riskier investments (company stocks and shares) when you’re younger, and gradually shifts as you near retirement, so that the balance of your investments is in less-risky assets (such as bonds and cash).

Pension fund investment advice

Choosing a pension fund can be complicated, and it’s usually sensible to seek out independent financial advice. If your pension has ‘safeguarded benefits’ (usually a guaranteed annuity) which exceeds £30,000 you must work with a regulated financial adviser by law. Working with an expert means they will offer you guidance on the best choice of funds to suit your stage of life and long-term ambitions.

At this stage it’s likely that your adviser will work with you to determine your investment style, attitude to risk and what you feel comfortable with. Generally financial advisers typically create profiles for investors. These are typically classed in three main strands:

  • Cautious – as someone who is risk adverse, you’ll be more comfortable investing in lower-risk assets.
  • Balanced – you prefer a stable mix of higher and lower risk assets.
  • Adventurous – if you are younger and can afford to take a long-term view, you may be more comfortable with a higher-risk strategy which may offer potentially higher returns, although some losses may also be part and parcel of this approach.

Your profile then feeds into which asset allocation breakdowns and funds you’re best suited to.

Managing those pension planning considerations

Your pension is usually one of the largest single assets you may have created. Managing your pension fund and supporting you with the above considerations is a specialist activity, and you’ll want to be sure you’re working with someone you can trust. Contact our team of professionals today.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.