Have you ever wondered, ‘where does my pension money get invested?’ It’s not a typical conversation starter at the pub that’s for sure. The answer though is more important to your financial future than buying your next round.
Your pension money will be placed into several different investment types, known as the investment mix. They’re like the ingredients in your favourite meal. On their own they don’t add up too much, but together it’s investment heaven!
The investment mix is the energy that powers the growth of your pension savings over the long term. That can make the difference between an okay sort of retirement and a stonker; the one where you can afford to do the things you always planned too.
The pension investment mix is typically made up of company stocks and shares, gilts and bonds (loans to governments or companies who pay you interest in return) and cash. Sometimes, it also includes property e.g. investing in shopping centres and office buildings. It’s also possible to put all your savings into one type of investment.
The use of several investment types ensures that your savings eggs aren’t just in one basket that you then rely on to grow your money. That’s important as investments can behave differently during good and bad economic times. This will then affect the value of your pension savings. History shows us that your savings will then normally go back up in value following a recession.
Stocks and shares are classed as being higher risk investments. They grow your money when the price of company shares and markets rise. They can be risky and can go down in value if we hit bumpier economic times. Over the longer term the growth shares provide drives up the value of your savings.
The risk in your investment mix can be lowered by introducing gilts and bonds. They’re generally safer than stocks and shares. Your money is lent to governments and companies by your pension provider who in return pay you interest. Although they can go up and down in value it’s generally a lot less than with shares.
Your mix of investments may also include commercial property: good old bricks and mortar. Your money is invested in shopping centres, or perhaps a business park. The rental income and any growth in the value of the property are added to your savings. As you know property values can be affected by recessions.
Finally, your investment mix will generally include some cash deposits. It’s a safe haven when the investment waters get choppy. Cash still comes with a risk tag. Inflation is the enemy. If your investment mix holds too much cash, then it won’t grow over the long term and inflation will eat it away.
Most workplace and personal pension schemes use some sort of investment mix (with the exception of some of the large public sector final salary schemes such as the NHS and civil service).
The money you, and possibly your employer, pay in needs to be invested for the long term in several different investments. The aim of the scheme is to grow your savings to fund your retirement, and that can’t be done by leaving it sitting in cash deposits.
It depends on how much risk you want to take and how long your money will be invested. You could have a cautious outlook, be a middle of the road sort of person, or a high-risk taker. Whatever you are, there’s an investment mix to suit your needs and the risk you want to take.
A cautious approach is likely to mean a lot less of your savings are in stocks and shares. The opposite would happen if you want to take a higher risk. Wherever you sit on the risk scale you might decide to take a higher risk in order to get a higher return because you have at least 10 years left before you retire.
Most pension savers use a financial adviser or get help from their provider. It’s even possible to decide the investment mix yourself. Unless you have the knowledge though it’s best to leave it to the experts.
We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.