How to choose a pension fund

alibean121

I've found myself in the happy position of now being with an employer where I can start to make significant pension contributions. I have a choice of funds and don't really know where to start. They use the friends life platform. I've been in the scheme for a year and initially chose a medium risk relatively balanced fund which lost about £2 last year on cash value of payments in.

Should I be aiming to choose something with a higher proportion of equities rather than including bonds etc as I am still in my 20s. Realistically my pension has 50 years to grow so it makes sense to be more ambitious or is it silly to invest purely in equities? Charges across the various funds are similar unless I opt for something actively managed.

I've never made investments before as my non pension savings are earmarked for a house deposit so feel a bit lost. I also don't think the sums involve merit paying £££ for financial advice although maybe I'm wrong as due to generous employer contributions total contributions in are around 30% of gross salary.

dunstonh

Should I be aiming to choose something with a higher proportion of equities rather than including bonds etc as I am still in my 20s.

From a timescale point of view yes. However, from a behaviour point of view, it depends. The further up the risk scale, the greater the losses will be during negative periods. Can you handle that? (some can't)

alibean121

dunstonh wrote: »

From a timescale point of view yes. However, from a behaviour point of view, it depends. The further up the risk scale, the greater the losses will be during negative periods. Can you handle that? (some can't)

I really don't know! I'd like to think I could be rational about how damaging the inflation could be with the alternatives. I haven't activated my online access and only get a yearly statement which I think discourages tinkering.

I mainly wanted to check it wasn't a totally insane idea.

AlanP_2

Certainly not an insane idea on the face of it as, like you say, you have a good few years ahead of you before you can access the pension.

A "typical" managed DC pension scheme will start to move you away from equities to (theoretically) more stable Bonds and the like as you approach planned retirement age - say 10% a year from 10 years out so:

Retirement - 11 years = 100% Equity
Retirement - 10 years = 90% Equity, 10% Bonds
Retirement - 9 years - 80% Equity, 20% Bonds
and so on

What this is attempting to do is reduce the risk of you being seriously caught out by a major stock market crash just before you retire.

This approach made sense when the "pot" was used to buy an annuity (that paid out £x per year for life) but as you have more options on what you do with the pot in retirement nowadays it isn't necessarily the right approach for everyone.

My suggestion would be to consider going stronger on equities for a good few years but keep an eye on what changes government make to pension rules - bound to change out of all recognition to what we know today,

dunstonh

If your pension fund was £100,000 (and it will be at some point) and you were 100% equity based and a stockmarket crash came similar to the dot.com decline or the credit crunch, how would feel about logging in and seeing your investment value at £59,000?

Would you think, shame about the loss but a great time to buy more?
Or "oh no, thats a lot of money, I need to pull out the stockmarket".
Or "oh well, never mind, I knew it would happen and it has."

bigfreddiel

AlanP wrote: »

Certainly not an insane idea on the face of it as, like you say, you have a good few years ahead of you before you can access the pension.

A "typical" managed DC pension scheme will start to move you away from equities to (theoretically) more stable Bonds and the like as you approach planned retirement age - say 10% a year from 10 years out so:

Retirement - 11 years = 100% Equity
Retirement - 10 years = 90% Equity, 10% Bonds
Retirement - 9 years - 80% Equity, 20% Bonds
and so on

What this is attempting to do is reduce the risk of you being seriously caught out by a major stock market crash just before you retire.

This approach made sense when the "pot" was used to buy an annuity (that paid out £x per year for life) but as you have more options on what you do with the pot in retirement nowadays it isn't necessarily the right approach for everyone.

My suggestion would be to consider going stronger on equities for a good few years but keep an eye on what changes government make to pension rules - bound to change out of all recognition to what we know today,

But St what point each year do you increase bonds and decrease equities? Do you stick strictly to annual changes at each anniversary, or do you try and time it roughly a year apart?

Because we all know it's time in the market and not timing the market.

Cheers fj

green_man

alibean121 wrote: »

I've found myself in the happy position of now being with an employer where I can start to make significant pension contributions. I have a choice of funds and don't really know where to start. They use the friends life platform. I've been in the scheme for a year and initially chose a medium risk relatively balanced fund which lost about £2 last year on cash value of payments in.

Should I be aiming to choose something with a higher proportion of equities rather than including bonds etc as I am still in my 20s. Realistically my pension has 50 years to grow so it makes sense to be more ambitious or is it silly to invest purely in equities? Charges across the various funds are similar unless I opt for something actively managed.

I've never made investments before as my non pension savings are earmarked for a house deposit so feel a bit lost. I also don't think the sums involve merit paying £££ for financial advice although maybe I'm wrong as due to generous employer contributions total contributions in are around 30% of gross salary.

If I was in your position I would put 100% in equities and just make sure you keep adding to it every month. By all means review the performance of your fund, but review against its index targets, what ever you do don't switch it into bonds or cash in the middle of a financial crash, this could be disasterous to your final outcome.

AlanP_2

bigfreddiel wrote: »

But St what point each year do you increase bonds and decrease equities? Do you stick strictly to annual changes at each anniversary, or do you try and time it roughly a year apart?

Because we all know it's time in the market and not timing the market.

Cheers fj

A good question FJ to which I don't have the answer .


My illustration was based on a DC scheme I was in a few years ago that I have since moved out of. I presume they would do it annually counting back from my 65th birthday date as that was the targeted retirement age within the plan.

Playing_with_Fire_2

Make sure you also check the charges for each option. My work pension defaulted me into a similar fund to the one AlanP describes, charging me 1.5% per year. However as I am years away from needing it, it would have been 100% in equities for the foreseeable future. I could also choose a equities tracker fund at a delightful 0.2% per year, giving me exactly the same asset allocation for lower charges. In exchange I will need to think a little more when I am heading towards retirement. For me this is a stellar deal, your needs may vary.

You should only look at your annual statement to check that it is still invested in the right things. I get my OH to put a post it over the 'current value' bit. In your 20's you should avoid looking at the day-month-yearly volatility (bumpiness) as it will only give you grey hairs. When you have them you can look closer.

What you should be looking at is increasing how much you save (/pay off debts). Do this for every pay review. If you aren't yet maximising the employer benefits aim towards this (30% is indeed very generous - if you don't know how long you will be with this employer for then now is a great time to give some money to future you). After you are getting the most from the employer benefits then think about other forms of saving/investment.

paset2glen

If you look at the behaviour of most pension funds, they invest primarily in equities as, on a long term basis, they outperform the bond market.

However, I would suggest a diverse portfolio of equities and bonds but with a heavier focus on equities. In terms of the equity component, I would suggest that around 70% of your portfolio consists of blue chip equities, e.g. FTSE 100 stocks, and the remaining 30% on mid, small and micro cap equities.

alibean121

Thanks everyone for the advice and comments. I've decided to go with a globally diverse equities fund.

I've already upped contributions to achieve maximum matching which has been pretty painful as I am trying to save for a house but hopefully it'll turn out to be sensible.