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Choosing pension investment funds

Most defined contribution pension schemes offer a wide range of investment funds.

Defined contribution pension schemes usually offer a range of different funds in which to invest your contributions. The number of funds offered by a scheme may range from a few to several hundred. Schemes such as self-invested personal pensions and group personal pensions may give you greater investment freedom.

How do I choose which funds to invest in?

Your pension provider should be able to provide information about the fund options available to you. Detailed information about each fund should be provided on a fund fact sheet. Before you invest in a fund, you should be given a Key Investor Information Document (KIID). This will explain the fund’s investment objectives, charges and other information.

There are thousands of different investment funds available to UK investors offering a wide range of different options, including:

  • Asset type ( e.g. equity, fixed interest, property or cash funds)
  • Investment in specific geographical areas (e.g. country or region specific funds)
  • Risk adjusted funds where assets are chosen to suit a particular risk profile or investment style (e.g. cautious, balanced or aggressive funds)
  • Combination funds which combine a number of the different sectors above (these include managed funds)
  • Funds which alter their risk profile as you approach a target date (e.g. lifestyle funds)


How are my funds managed?

Any of the options above can be managed on an active basis (i.e. the fund manager makes choices) or on a passive basis ( i.e. the fund tracks the relevant index).


What are the investment risks?

While all investment funds are designed to produce investment returns over the medium to long term, the assets that a particular fund invests in will have an effect on determining the fund’s risk profile. This basically means whether the fund profile will be a low, medium or high risk.

Funds that invest in high risk assets have the potential to produce higher investment returns over the longer term. But, they may lose value due to the volatility of the investment market. This means that they may be severely affected by market downturns and other factors.


Comparing investment funds

When comparing similar funds, you should also look at the charges. Charges act as a drag on fund performance and the higher the charges, the greater the effect.

However, a good fund manager may justify the higher charges by achieving greater performance. Looking at past performance may help, but remember that past performance should not be relied on to predict future fund performance.


Investing in more than one fund

Most pension schemes allow you to invest in multiple funds, although there may be a maximum number of funds that they allow at any time It’s generally a good idea to invest in several, so that you don’t rely on the performance of one individual asset. Investing across many funds means that any risk to your investment is spread. This approach to investment is called ‘diversification’. But this type of investment can also concentrate the risk, in other words increase it, so it’s good to make sure you know what is the most suitable choice for you.

If you decide to invest in multiple funds, you will start to build a portfolio of investments. All of these will grow at different rates. Over time, the funds growing at a higher rate will start to represent a higher percentage of your overall investments. This means that the risk profile may change.

To prevent this from happening, you should review your ‘portfolio’ of investments on a regular basis, and think about switching some of the higher risk assets into different funds. By doing this, you will bring the overall asset allocation of your ‘portfolio’ back towards the initial asset allocation you originally invested. Again, as investment market conditions change, you may also need to review the funds that you are investing in to check that they remain appropriate for your needs.

If you need help in choosing funds and managing a portfolio, you may want to consult a regulated financial adviser. But, please remember an adviser is likely to charge you for their services.


Frequently asked...

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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