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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