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Pension funds
The deposits you make into your pension pot are not sitting there as cash, but are invested in different assets. The most popular vehicle used by pension providers is a pension fund — a collection of different assets in one investment, designed to spread your investment risk and aiming to generate returns.
This article isn’t personal advice. When you pay into a personal pension, your money is usually invested in stocks and shares. The value of these investments can rise or fall, so you might get back less than you put in. Returns aren’t guaranteed. Pension tax rules may also change in the future, and any tax benefits you receive will depend on your individual circumstances.
- Pension contributions are invested into assets like shares, bonds, and property, within a pension fund — a pool of many different pensions, put to work to generate returns.
- Some providers offer Target Date Funds, which automatically shift your investment strategy from riskier, growth focussed assets to lower-risk, cash-like assets as you approach retirement.
- Most workplace providers allocate you a default fund, which may not be tailored to your specific goals. It’s essential you check that your investments match your risk profile.
What is a pension fund?
A pension fund is a large pot of money pooled together from many different pension savers. Professional fund managers use this pool to buy a diverse range of assets within their pension plans, such as:
- Shares: (equities): Owning small parts of companies (e.g. Apple, Shell, Tesco). Historically, these offer high growth but come with higher volatility.
- Bonds: Loaning money to governments or corporations in exchange for interest. These are generally safer/lower risk but offer lower returns.
- Property: Commercial real estate like warehouses and office blocks.
By investing in a fund, you don’t choose specific investments yourself. The aim of holding a fund is to spread your risk over hundreds or even thousands of assets, to smooth out the ups and downs of the market.
What is a target date fund?
A target date fund (TDF) is a type of pension fund designed to make retirement planning simple and automatic.
Instead of asking you to choose a level of risk when you start pension saving, you simply enter the year you plan to retire.
- In the early years (when retirement is far away) the fund automatically invests mostly in shares to maximise growth. You can afford to take risks because you have time to recover from market dips.
- In the later years (as you approach retirement) the fund gradually shifts your money into safer assets like bonds. This protects your pot from volatility as you get closer to needing the money.
The ‘glide path’ approach removes the need for you to constantly monitor and rebalance your portfolio, as the fund does this for you.
Choosing a pension fund
If you are managing your own pension (like in a SIPP) or looking at your workplace options, choosing the ‘right’ fund depends on your timeline.
- Timeframe: If you have 30+ years until retirement, inflation could erode the returns from lower risk assets, so some exposure to shares can help beat rising prices. If you’re retiring next year, you’ll likely want the safety from cash or bonds.
- Risk tolerance: Think about the risk you’re comfortable with. Can you handle watching some ups and downs as the market moves? If not, a lower-risk fund might be better suited to you, even if returns are lower.
What is a default pension fund?
A default pension fund is the investment option you’re automatically allocated when you join a workplace pension scheme. It’s a ‘one-size-fits-all’ solution for the average employee.
While default funds are regulated to be suitable for most people, they are not tailored to your specific circumstances or retirement savings trajectory.
They typically take a balanced approach that’s potentially too cautious for the younger saver or too risky for someone closer to retirement.
Some default funds use a target date approach and adjust automatically, check whether yours does.
How to check your pension fund
To check which pension fund you’re invested in and how it's performing:
- Log in to your provider’s app or website
- Find your fund ‘factsheet’. This document will give you a breakdown of what the fund is invested in, along with past performance and the risk profile.
- Check your fees: Look for the Ongoing Charge Figure (OCF) or Annual Management Charge (AMC). Just as investment returns compound over time, so do the costs of high fees, making them more damaging than they might initially appear.
Pension consolidation
Understanding where your pension savings are invested is crucial, but this can be very difficult to track if you have a lot of different pots from previous jobs; some of which you may have difficulty accessing.
Managing a portfolio of scattered funds can mean you’re paying higher fees, losing track of documentation, and lacking a clear strategy. One solution to this may be to consolidate; bringing your pensions to one provider that gives you complete oversight over how much you have and where it’s invested.
Note: Before consolidating, check whether any of your existing pots have valuable guarantees, such as a guaranteed annuity rate, that would be lost on transfer. Read our next guide to learn more.
Important limitation: The Chip SIPP does not currently offer a drawdown service. To access your funds at retirement, you will need to transfer your pension to a provider that supports drawdown.