As part of the process of choosing a pension it is important to consider how you would like your money to be invested. The majority of pension providers now offer a wide range of funds to choose from which can include lifestyle funds or sometimes target-date funds and a choice between both active and passive investment management of your pension money.
Lifestyle and target-date funds shift their investment profile as you move towards your retirement date. They start off with a higher allocation to equity investments such as shares and then move part or all of the fund to cash and bonds as they approach their target date. This can be good if you are likely to purchase an annuity at retirement but may be a bad choice if you are likely to leave the savings invested.
Active management provides you with a professional fund manager who will attempt to beat the market, whilst passive management provides a very low cost route to achieving the market average.
With investments generally the more risk you are prepared to accept will lead to higher returns over the long-term but also normally means more volatility (up and down movements) which can be very scary to the inexperienced investor and may mean you making bad decisions should your investments fall unexpectedly.
Investing in cash and bonds to deliver a predictable return may seem prudent but over the long-term inflation could wipe out any gains you make, whereas investing in property and shares is likely to give you a return over the long-term significantly above inflation making your money work harder for you but you have to live with the increased volatility. More information is available in the section Investment Principles.
When you save for a pension, you shouldn’t just focus only on how much you’re putting into it. You should also regularly review how it’s being invested. And as you get older, you should probably change your investment strategy to reduce risk as retirement draws closer.
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