Choosing the right investment for your pension account is one of the most important decisions you need to make as part of your retirement plan. While the majority of pension plans provide an automatic choice for your savings (often known as the ‘default’ option) this may not be the best choice for you.

So what do you need to think about when choosing the right investment?

Risk and reward

Any investment involves some sort of risk, but what do we mean by risk? When most people think about risk, they think of it in terms of danger and potential loss. Risk can mean uncertainty too – not being able to predict exactly what might happen in the future is a risk we live with every day. Of course, taking a risk can be stressful but it can also be rewarding

Risk in retirement

There are three main risks you need to be aware of when you are choosing how to invest your pension fund:

  • Investment risk – is the risk of your pension savings falling in value.
  • Inflation risk – is the risk that your investments may grow at a rate less than the rate of increase in the cost of living (inflation). For example, if inflation is, let’s say, 4% over time and your investments are only growing at 2%, rising prices will erode the value of your pension savings.
  • Pension conversion risk – You may decide to use some or all of your built-up savings to buy a pension via an annuity, which will provide you with an income in retirement. The amount you will get depends on a number of factors, including interest rates, the level of inflation when you retire and your anticipated life expectancy. Pension conversion risk is the risk that your investments don’t protect you against the cost of buying an income in retirement.
  • Fund size risk - this is where the size of your pension pot is too small to support the level of income withdrawals you might want to take. Similar to pension conversion risk (where the annuity rate you get is lower than you might have assumed), fund size risk means that your pot size is less than you might have aimed for.

What kind of investor are you?

Having identified the main risks, the next stage is to determine your attitude to those risks. Are you prepared to live with some degree of investment risk if it means a better chance of achieving higher returns? Are you totally ‘risk averse’ and don’t want to risk your capital under any circumstances; or are you somewhere in between? To help you decide, all funds have a Fund Fact Sheet to provide you with details of each fund, its past performance, risk rating and the assets it invests in.

If you are a member of a BlackRock pension you can log into TargetPlan to use our risk profiler and view the funds specific to you.

What does this mean for you and your pension?

Most pension plans offer a range of investment options so you can choose one that fits with the type of investor you are. The different type of investments will have different levels of investment risk and so different levels of potential growth so you can match these to your individual needs and goals. These most common types of investments, or asset classes, that you can choose from in a typical pension plan are:

  • Equity Funds
  • Multi-Asset Funds
  • Bond Funds
  • Cash Funds
  • Active and Passive Investing

Which investment style works best for you?

The style of fund you select should be carefully balanced towards your financial goals. Some investors are comfortable in selecting their own range of funds. If you are unsure which funds to select for your pension, we recommend you seek financial advice.

Risk/reward summary

  • Aiming for high returns usually means accepting more risk.
  • The higher the returns you aim for, the greater the chance of risk to your capital (losing some or all of your initial investment).
  • Investing for the long term usually means you can afford to take more risk and ride out the ups and downs of market values.
  • Investing in company shares (equities) is generally acknowledged as the best way of providing growth that beats the effects of inflation over the long term although it does involve capital risk.
  • While there is a risk attached to equities, investing over the long term gives you more time to recover from any losses should there be a fall in the stock market.
  • Investing in bond funds can help to reduce the impact of changes in annuity rates as you approach retirement.