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Pension plans: Understanding pension fund investments
Most people grasp the basics of pensions: money is withheld from your paycheck and “invested” and upon retirement a nice pot of money awaits you. Simple, right? But how many among us really know what happens to that money between paycheck and retirement?
Your money is invested into funds. Different company pension providers will offer different types of fund and all of these will carry a different level of risk.
Different types of pension investment funds
When you open a pension you will usually be asked to make a selection from the provider’s different funds. The type of company pension plan you take out will determine the selection you are offered and how often you can change your investment type. For example, with a SIPP (Self Invested Pension Plan) you can choose from the full range of HM Revenue & Customs approved funds and have freedom to change your investments to get the best possible return.
Type of fund
Why would you invest?
Low risk and still earn interest. Excellent as a holding strategy, when you are close to retirement or feel the equity market is unsafe.
Low risk. Works as a loan.
Shares sold on the stock market. Potentially high return and can specialize in a certain market.
Invest in the equity of a foreign country.
Ethical (Stewardship) Fund
Socially beneficial and responsible.
Spreading risk over a number of different funds.
Invest in commercial property. Good long term returns.
Changing the risk levels from an aggressive to conservative strategy over the life of the pension.
Choosing the right company pension provider
It is hard to know what company pension funds are right for you and it will really pay off to give this some consideration. Here are a few tips to make the most out of your pension investments:
- Change your investment funds over time. You may want to take more risks when you begin saving, and change to a low-risk strategy when you are closer to retirement.
- Risk and reward tend to move in the same direction.
- Length of investment. Only investing in a fund for a short amount of time tends to generate little return, whereas higher earnings tend to be realized when you stick with a well performing fund.
- Investing in foreign pension funds can be an excellent way to make a healthy profit, but do consider currency fluctuations.
- Spread your pension investments over a number of funds.