Your pension is one of the most valuable things you will ever own, so it's bizarre how little effort most people put into making the most of theirs. Thousands of investors set up a pension, opt for a default investment, and then forget it until retirement. However, where your pension fund is invested makes an enormous difference to how much money you have to live on in your old age. It's therefore essential that we make a conscious, sensible and informed decision.
Unless you have a final salary pension, you will have a choice where you want to invest your money. It doesn't matter whether you have a stakeholder pension, a scheme run through your employer, or a SIPP, you still have a range of investments to choose from.
The range will depend on the pension you have, so it's worth digging out the paperwork, or contacting the scheme provider to find out what your options are.
At one end of the spectrum a SIPP is a pension that works like an investment platform and will let you invest in any fund open to UK investors - along with individual shares, bonds, and a host of other things. At the other end, a basic stakeholder scheme will let you chose from a few funds. And in the middle are more comprehensive workplace and personal pensions, which will tend to offer a choice of at least 100 funds.
How to choose
Many funds will have a default option - which is chosen by the pension company or the scheme administrators in order to be largely suitable for a typical person. It offers the comfort that the experts don't consider it to be too left field, but it's worth looking at this objectively and deciding whether it is right for you.
Picking your investments is in many ways like choosing any other kind of investment fund. You need to consider your objectives for growth, and the level of risk you are prepared to take in order to get that growth. Then you need to find a fund or a range of funds that match your needs.
You may want to leave the experts in charge, and opt for a diverse fund that invests in a number of different assets and has a specific aim in mind - such as balanced growth, higher risk growth or steadier income. It's worth remembering that you will have an extra layer of professional management in a fund like this, so it's worth checking what you will pay for this expertise in terms of fees and charges.
Alternatively, you may want to put together a mix that suits you more specifically, choosing some corporate bond funds, and some equity funds, with a mix across different company sizes and parts of the world depending on your growth ambitions and risk tolerance.
So far it sounds like any other kind of investments. However, there's one big difference: time. You will have a pension for far longer than the vast majority of other investments, so you need to take a long-term approach.
Typically most people will be able to take a higher level of risk in the early years, because there are so many decades during which to ride out the ups and downs. This may mean investing in mainly share-based funds, with exposure to high growth companies and markets - which tend to be more volatile. This is likely to suit you in your 20s and 30s, but after that a re-think may be on the cards.
As you get older, and the fund grows, your emphasis is likely to move from growth to protecting the value of your funds. You won't make a sudden and complete shift into this territory, but are likely to gradually move portions of the portfolio on a regular basis, so that by the time you get to your end date, everything is in safer assets like bonds and cash.
If you are planning to buy an annuity, this 'end date' may be the day you retire and buy the annuity. If you intend to keep your money invested during retirement, instead of having a single 'end date' at 65, you may have a number of stages where you take cash in your 60s, 70s and 80s. It means de-risking more slowly, because some of your cash could have 30 years or more to continue growing.
Whatever strategy you take, it's essential to revisit the performance of your investments and the balance on a regular basis - ideally every year. That way you can check whether the fund is performing as you are expecting, and whether it still matches your aims and risk appetite. The balance that suits you at the age of 20 - with half a century or more of investing ahead of you - is very different from the balance you need the year before you buy an annuity.
As ever, if you are not comfortable making these decisions alone, an investment professional can help. You will pay for their advice, but given that your pension could eventually be worth hundreds of thousands of pounds, you may consider this a price worth paying in order to make the most of your money.