Many pension schemes, especially workplace pensions, have a default pension fund that your contributions will be invested into if you don’t take any action when you open the scheme. Often, this is a “lifestyling” fund that reduces the risk level of your pension investments as you approach retirement age. But regardless of whether you proactively chose your initial pension fund, you don’t have to stick with it. Most pension providers will offer a range of pension funds, and it’s worth reviewing which one is best for you.
A pension fund is an investment product that is designed to help you save for your retirement. Pension funds are made up of a portfolio of assets, which can include shares, property, bond, and specific investment funds. As well as your own contributions, tax relief and any workplace pension contributions from your employer will also be invested in your pension fund.
Pension funds hold the investments of large numbers of people saving for retirement. In most cases, a pension manager will be responsible for choosing the specific assets included in your pension fund, though you will have some say over the nature of your fund.
Yes, although the nature of the choice will depend on the type of pension you have. Most people these days save into a defined contribution pension (defined benefit workplace pensions work differently), and there are 3 broad types:
The nature of the choices you’ll need to make will depend on the type of pension you have, so that’s your first consideration. If you have a workplace pension, you’ll be limited by the options available through it, but it’s worth taking time to review whether the alternatives to the default would be better for you based on your personal preferences, retirement goals, and appetite for risk.
If you’re opening a personal pension, check the options available carefully, as some offer more choice of funds than others. Generally speaking, standard personal pensions ae better for less experienced investors who want a more hands-off approach after they’ve chosen the broad type of portfolio they want. As with workplace pensions, your choice of funds in a standard personal pension will usually be dictated by appetite for risk, retirement goals, and personal preferences. Some pension providers offer tools or questionnaires to help you choose.
A SIPP might be the right choice if you’re an experienced investor who wants to take more control over your finances, as you can pick and choose the assets that make up your pension fund. Different SIPP providers will offer a different range of options. For example, some specialise in offering a range of exchange traded funds, while with others you can mix and match from a wide range of assets, including shares in individual companies, or specific investment funds that appeal.
There can be a lot of factors at play when choosing the specific assets that make up your SIPP. Personal preference, goals and appetite for risk will still play a key part, but you will also need to look more closely at investment performance of individual assets (though bear in mind past performance doesn’t necessarily reflect future performance) and make sure you diversify your portfolio.
Assuming you want to stay with the same pension provider, changing pension fund should be fairly straightforward.
If you have a standard personal pension or a workplace pension, the first step is to double check what pension funds are available from your provider. Most publish details of these on their websites, but if not you can call and ask for information.
Then, once you’ve chosen your fund, request the switch. If you have an online account, some schemes will let you log in to switch funds. Otherwise, a quick phone call should get the job done.
If you have a SIPP, you usually have more flexibility to change the specific assets in your pension fund as and when you wish, using your provider’s investment platform.
If you’re considering making substantial changes to your pension fund, and need some help assessing the pros and cons of doing so, it could be worth speaking to a professional financial adviser first.
You can indeed – but how to do so depends on the nature of your pension (or pensions). If you only save with one pension provider, you’ll be limited by its offering. Some may let you split your retirement savings across multiple pension funds, but others may require you to choose just one.
If the latter applies but you want to invest in multiple funds, you can switch completely to another provider that offers more flexibility. Or, if you want, there’s nothing stopping you opening an entirely separate pension scheme and splitting your savings across two (more more) providers.
Passive funds replicate and track an index (such as the FTSE 100). The idea is that the returns will mimic those of the index the fund is tracking (minus investment fees). Returns will never be able to beat the relevant index. The strategy minimises buying and selling in order to save costs.
With active funds, on the other hand, a dedicated fund manager tries to pick the best stocks with the goal of beating the returns you can get from passive investing. While this might seem like a good idea, human beings are fallible. So you have at least as much chance of an active fund underperforming a passive fund. That’s particularly when you take into account the higher fees you’ll pay for the fund manager to actively manage your account.
The type of pension fund management you opt for is ultimately your call, but if in doubt it’s wise to seek financial advice.
The risk level for any investment fund, including pension funds, indicates how likely it is that an investment will fail to perform against expectations. Higher-risk funds tend to also come with higher potential reward – so you’re effectively balancing off the chance of greater returns against the possibility of loss.
Some pension funds will use numbers to indicate their risk rating (with 1 being the lowest and 7 being the highest, for example). Others may use fund descriptions – such as cautious, balanced or aggressive – to help you choose.
The right risk level for you will depend on your risk appetite and life stage. For example, a younger person with plenty of time for their pension to ride out any market volatility may be in a position to take more risk than someone who is close to retiring.
Even if you don’t have a SIPP, that doesn’t mean you have no say over how your pension savings are invested. Personal pensions may have more options, but even workplace pensions should offer a choice of pension funds. Switching to a different pension fund should be pretty straightforward if you want to – check your online account or call your provider to ask about your options. It’s an important decision, though, so weigh up your options carefully and – if in doubt – seek professional advice.
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