Investing your pension pot is a great idea. If done well, it can mean that the amount you save towards your pension is healthily supplemented and has a better chance at lasting for the entirety of your retirement. While many of us want to do this, it can be confusing to know where to start. From choosing your scheme to maintaining it, there’s a lot to consider to make sure that we’re getting the most out of our pension. Here are some top tips to get you started…
How to choose your product
When you’re selecting the scheme you want to invest in, make sure you understand what is available to you. One option is an income drawdown scheme. This allows you to take out some of your pension while the rest remains invested. In the simplest of forms, this is an investment portfolio that allows you to withdraw an income to live on. You’ll need to plan out your money well with these schemes, to ensure money doesn’t run out before you die.
Another option is to buy a fixed-term annuity. This is a short-term investment product that allows you to let someone else make the decision as to how you fund retirement, or even delay when the decision is made. The length of the term can vary but it is often two, three or four years. The advantage is that you can’t alter them, like a regular annuity which lasts the rest of your life.
How much should you take?
Should you take out a drawdown scheme, you’ll need to carefully consider the amount you want to take out as income. Although you can expect to add to the amount, through good investments and interest, you’ll still need to ensure that there is enough money to last you. A good rule of thumb is to allow yourself around 3.5 to 4% per year of your total amount. Using this model, you’ll need to work out how much you need to live off a year and use this as a guide for understanding the figure you need to save.
For example, if you need £12,000 a year and take this as 4% of your total amount, you’ll need to save around £300,000 to be able to do this.
You should also be aware that the amount in a drawdown scheme can decrease as well as increase. This means that you may have to reduce the amount you take as income or save more if you want your money to last.
How to minimise your risk
As your investments can go up and down, its best to spread your assets to decrease the amount of risk you are taking. There are several great options available that will allow you to spread your investments, while still giving you good returns on investment. Shares, corporate and government bonds, cash, commercial property and more complicated investments like private equity and hedge funds, or absolute return funds, are some options you can take.
While diversifying your investments doesn’t eliminate all risks, it does help to minimise any damage done should one of your investments tank.
How to review your investments
No matter how strong the investments are, you should constantly evaluate their performance. It’s no use setting up your pension scheme and then leaving it until you retire. Experts recommend that you should check your investments at regular intervals, such as once a year. It’s a good idea to always do these checks at the same time every year so you can make a year-on-year comparison.
While it’s important to check up on your investments, don’t do it too often or you risk being too tempted to make lots of small changes which can rack up extra charges.
Before investing your pension or making any major changes to your scheme, it’s a good idea to consult a professional financial adviser. This will give you personally tailored advice, designed to give you the most out of your pension.