Investment choices for pension savings: Part 2
Last week, I looked at using the "default" investment option if you are contributing to a defined contribution (DC) pension scheme.
If you decide the default is not for you, then you need to look a little further.
You first need to think about whether you will be happy making your own investment decisions, and whether you feel as though you know what you are doing.
Some people do, and some do not.
Let us look first at people who are not completely at home with investments.
You do not need to be an ice cream expert if you fancy trying a new flavour, because the worst that can happen is that you end up with a cone of ice cream you do not like.
The worst that can happen if you choose investments you do not really understand is that you might lose a great deal of money and endanger your retirement plans.
So if you are looking to experiment with investments, you also need to commit to keeping everything under review. Otherwise a pension might not be the best place to start.Take advice
Firstly, you should try to take advantage of any information and support available.
Do not be afraid to go back to the default option”
Your employer will usually provide free access to literature and tools that will help you understand the specific options offered to you.
Your employer may also make financial advice available at no or reduced cost, although that is less common.
Sometimes the charges in the plan will pay for some advice to be provided, in which case make sure you get your share.
Alternatively, you could seek your own advice.
Find out what it might cost, in terms of either a fee or charges.
However you take your advice, you should probably commit to refreshing it every few years, to ensure that the choices you have made have kept pace with any changes to your life.
Financial advice needs to look at all of your circumstances - this and other pensions, your housing costs, any debts and even your state of health.
So try to resist the temptation to take informal advice from friends and family - there is a reason why financial advisers need to pass exams.
If at the end of this you are not inclined to take the advice, and you are still none the wiser about investments, do not be afraid to go back to the default option.Do it yourself
Now let's think about those who feel comfortable with investment decisions.
These might be the people who have their own share ISAs or who are willing to take a punt.
The first question to ask yourself is how long you are investing for.
If your retirement date is looming, you probably want to focus on preserving the value of the retirement income your fund will be able to buy.
You probably want to have less and less money in stock markets as you get closer to retirement.
They are unpredictable in the short term and you may not have the time to make up any big losses.
Instead, you might want to invest in bonds and cash.
If you are some way from retirement, there is a further question.
How much risk are you happy to take in pursuit of higher returns?
If you are prepared to take a longer term view and watch the value of your fund go up and down, exposure to the stock market may be a good approach.
In this case, do not be afraid to have a substantial proportion of any stock market investments outside the UK.
The UK only accounts for about 10% of global share values, so you will spread your risk if you widen your investments.
If you are feeling particularly brave you may want to have some money in so-called emerging markets, as that might be where future economic growth is going to come from.Bonds, not shares?
If you do not like the idea of seeing your pension fund on a roller coaster, you may want to look at investing more of your money in bonds, perhaps through funds with a mix of investments.
Remember, lower risk funds are usually expected to grow more slowly, so the knock-on effect is that you may need to plan to pay higher contributions or retire later.
You will need to repeat this process every few years so you can check how near you are to retirement, and to see whether your appetite for risk might have changed.
One last tip.
Do not fall into the tempting trap of looking at past performance and thinking it is an indicator of the future. It is not
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