Top Tips for Investing Your Pension

When it comes to our pensions, there can be a lot of uncertainty about the best way to handle them. Though we pay into one, or several, over the course of our working lives and try to save enough money to live on, is simply leaving our money alone the best way to handle your ‘pot’ for the future? Many of us are playing it safe by leaving our money alone, meaning we’re missing out on opportunities to make more money through careful investments.

Striking the balance between holding onto cash and investing wisely is difficult, but it’s something that we really encourage people to look into at Prestige. This week, we’ve got some advice on the safest ways to invest your money and still see the best returns.

The rational approach to investing in retirement

The Pensions Freedom Act 2015 has opened up more ways for people to access their pensions, and more choice.

Income funds and trusts are becoming popular choices for investing in retirement. These systems allow you to invest primarily in leading companies and promise to provide a steady income as well as see your money grow. Through the schemes backing high profile and financially diverse companies, there is less risk as these businesses are more secure.

Balance high and low-risk investments

If you don’t take enough risks, it is unlikely that your money will grow enough to give a sustainable and reasonable pension throughout your retirement. Risks are more likely to give big payoffs and will have a bigger impact on your pension pot total. To gain a good return, taking some risk is vital.

On the other hand, too many risks could negatively affect your total too. Putting all your money into high-risk investments leaves you vulnerable to market fluctuation. This means a higher risk of losing all your pension pot early on in your retirement.

The goal of investing your pension is to leave you enough money to live on for the rest of your life after you’ve stopped working. Whether you’re taking too many risks or not enough risks, both methods leave you in danger of running out of money earlier than expected.

The best way to achieve a good return is to carefully balance these 2 approaches. Your pension pot should be spread across company shares, bonds and property, both at home and abroad. This means you are less likely to be dramatically affected by certain markets crashing. A diversified portfolio provides better returns while also smoothing the ups and downs of individual investment.

Invest early for bigger returns

The earlier start saving for your pension, the better position you’ll be in come retirement. Not only will you have put more money due to the longer period of time, you’ll also benefit massively from compound interest rates. This has a snowball effect in your savings, as interest rates are earnt on profits you have already made.

If you invest £10,000 and it grew by 5% steadily each year, with compound interest, you could see your pot rise to £70,400 over 40 years. This continued growth benefits from prompt action.

As well as this, it’s a clever idea to take risks when you’re young. This can either give your pension pot a big boost early on if successful or give you enough time to recuperate should your money decrease. Early investment into your pension will pay off in the long run.

Lower withdrawal rates

Your pension can also last longer if you take a lower withdrawal rate from your investments. Taking a more moderate income of £4,500 a year is consistent with current annuity rates and leaves more of your money in your investments.

Taking your money gradually is also a method to consider. This is called an “uncrystallised funds pension lump sums” (UFPLS) and it allows you to take out lump sums when you need. Each withdrawal is 25% tax-free, with the remaining 75% facing your usual income tax rate.

Leaving your money in its investments, either through taking small amounts or over a large amount of time, could see potential investment growth providing higher returns. This will see your pot continue to increase in value.

This amount can be adapted to your current situation and how well your money is performing. Before deciding on what your withdrawal rate should be, it is best to discuss your financial situation with a professional financial adviser, who can give clear and personalized guidance.

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Top Tips for Combining Your Pension Pots

Over the course of our working lives, many of us have worked different jobs. This can mean we’ve paid into several different pension pots over the years. Keeping track of where our money is and all of the associated paperwork can be difficult. At Prestige, we’ve created the handy guide below to help show you how consolidating your pension pots could be the right move for you.

The positive effects of consolidating

  • Convenience: Above all, combing your pension pots makes keeping an eye on your pension easier. Not only will this mean that it is simpler to manage as it is all kept in one place, you may also have access to a wider range of investors. It can help you gain a better investment performance.
  • Save on fees: If you look around when deciding which scheme to consolidate your money into, you may find that you’ll be able to reduce the charges you pay on your pension. Some older schemes carry much higher fees than new ones, so it may be best to move older pots into a newer scheme.
  • Greater range of investment: This is especially seen if you transfer your pension savings into a self-invested personal pension (SIPP). With this, you’ll be able to invest your money into a wide range of investments, from shares to investment trusts. The main benefit of this is that you won’t be restricted to pension funds offered by any single pension provider.

Although combining your pensions makes life simpler, make sure you’re aware of any risks of doing this beforehand. You could lose out on loyalty bonuses and face exit penalties. Looking into the risks, or contacting a financial adviser for help before you act, could prevent big losses.

Factors to consider about consolidating your pensions

Whether you should consolidate your pensions depends on your individual situation. This comes down to how many pension pots you have, how much they’re worth, the terms of these schemes, and how far you are from retirement age. If you are considering buying annuity, consolidating your money could give you a better deal and a bigger monthly amount.

Before switching your pension, bear in mind any advantages that you may be giving up. If the scheme is offering a guaranteed annuity rate, it may be worth sticking with it. These guarantees tend to give higher payouts as many of them were set with interest rates as high as 11%.

In addition, some policies give life insurance, which you might lose if you switch. Make time to look into the benefits of each system and what you stand to lose by consolidating.

Making the best of what you have

Any money that you have saved should be working as hard as possible to get the best returns for you. Moving into a pension that offers a higher growth could mean that you’re retiring with more money. For example, if you have an old scheme worth £30,000 at age 40 that is earning 4% interest a year, you’ll see your fund grow to £79,975 by the time you’re 65. Alternatively, a scheme with a 7% interest rate would see your figure rise to £162,823. It pays to understand where your putting your money and put as large an amount as you can to gain the biggest return on investment.

Choosing the right pension scheme for you

When deciding which pension scheme is best for you to consolidate your money into, shopping around is essential. Looking at any schemes you’re currently invested in helps you understand where your money is going. Making a note of annual management charges and initial charges on money that you transfer in will give you a good idea of the benefits of each scheme.

Don’t feel trapped by any of your current pension schemes. If you feel like the investment performance is not good enough and you can do better, you can move all your money into a brand-new scheme that is better suited to your needs.

Before moving your pension or opening a new scheme, it’s worthwhile to talk to a professional financial adviser to get advice tailored to you.

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