Investing for retirement has been the hot topic of the week after the chancellor’s Budget on Wednesday. Jeremy Hunt scrapped the Lifetime Allowance, increased the amount that can be added to a pension each year from £40,000 to £60,000, and changed the amount of money that savers can put into their pension after already making a withdrawal, from £4,000 per year to £10,000.
With such a spotlight on pensions, it is worth knowing how to make the most of them.
A defined contribution (DC) scheme is the default option for most employees, so this is what I will focus on here. Under this arrangement, workers put money from their salary into their pension, with their employer usually matching this figure up to a certain amount.
Most of these are then put into a default scheme, which is typically invested based on a range of factors including how long you have until retirement and risk profile. However these schemes can tend to err on the cautious side, which may not suit all, especially younger investors who have a long time to invest and watch their savings grow.
Even people nearing retirement may wish to have higher allocations to equities, which over the long run have proved to beat fixed income.
There is nothing wrong with taking a lower risk level as we get older, and circumstances may even require it, but savers should first look to diversify their equity risk across a greater selection of different asset classes first.
There are several reasons for this. First is the assumption that bonds are somehow ‘safe’ – a hypothesis that has been severely tested over the past year.
As Paul Derrien, investment director at Canaccord Genuity Wealth Management, said: “The lower end of the risk scale experienced the greatest falls in 2022, and if you were drawing down from your pension at this time, it could have had a much more negative impact than you were expecting.”
Another is that, even in or near retirement, many people working today will still live for decades more, meaning that some form of growth should also be considered – not just fixed income.
This can be especially problematic for anyone with a personal pension, where people often hold cash or low-risk government bonds, according to Claire Trott, divisional director of retirement and holistic planning at St James’s Place. She said such positioning “should be avoided for long periods of time as the funds invested will lose value because of inflation”.
Derrien said that if investors are confident, managing their own retirement savings is an attractive option and one that most pension providers offer. This can be through a self-invested personal pension (SIPP) or by managing the allocations yourself in a DC scheme.
“If you have the ability and inclination, then you may be better off allocating yourself, as you can mix the duration to suit your view of markets, mix between government bonds and corporate bonds, and look to increase and decrease your overall weighting to bonds to suit the market outlook,” he said.
However, it is always best to seek financial advice on not only the investments, but also the level of contributions being paid, before making any concrete decisions, as these may not be enough to support retirement goals
Trott added: “If you are not seeking advice, then the funds available will generally provide some guide with regards to the risk they pose. If you can determine how you feel about risk, this is a good place to start determining what is suitable for you.”