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Options for investing your pension

If you have been following the news on pension reform in the media recently, you will have noticed that there has been a lot of discussion on pensions.

Words like ‘drawdown’ and ‘investment’ have been used very frequently.  The difficulty however is that a lot the discussion is quite difficult to understand, particularly in terms of the new options for making pension pots work harder.

At Unlock My Pension we have taken a look at some of the options available to people under the new rules, and this post gives an overview of the different investment products available.

What do we do by ‘investing’ our pension?

It may sound stranger but under the new pension rules, you now have a lot to consider in terms of what to do with your pension.  Unless you are fortunate to have been participating in a ‘final salary’ pension scheme, you will likely only be entitled to a pension that you yourself have been paying into over the course of your lifetime.  You would then have purchased an annuity from an insurance company with this fund, providing you with an income in your retirement.

However under the new rules you may want to think more on making your pension work harder for you.  You have the option of, as opposed to buying an annuity, taking 25% tax-free as a lump sum and leaving the remaining monies in what is known as a ‘Self-invested personal pension’.  This is where your pension is placed into a financial plan that is a mixture of shares, funds and investment trusts.  You can then take an income from the growth that these investments enjoy.  This is called ‘drawdown’.

What options are available?

As mentioned earlier a Sipp is normally a mixture of different kinds of investments, and there are several different products available on the market:

1. Multi-asset income funds

As the name suggests, these products normally include a variety of different ‘assets’.  The pension pot will in all likelihood be spread out across shares, bonds and even property.  These funds can be particularly useful as they increase the potential for the fund to see growth: the pension fund is not placed in a single asset.

The point to bear in mind is that different funds will be administered by different organisations who will have particular expertise on the likely growth that could be expected for the investment of the pension fund.

2. Target date funds

These products are not dissimilar to multi-asset income funds in that the pension fund will normally be distributed into a variety of different assets.  However the placing of the assets will change as the investor or saver (you) get older.  The term ‘target date’ refers to the year that you as an investor expect to start drawing an income from the fund.

3. Investment trusts

Arguably one of the more well-known products, investment trusts are actually companies that are featured or ‘listed’ on the Stock Exchange.  They will use the investment that you make (your pension) and invest in them in the shares of other companies.

Depending on your particular circumstances, one or another kind of Sipp may be preferable.  However there is an important point to keep in mind.  Many regard a Sipp as a welcome alternative to purchasing an annuity for an income in retirement because they believe that:

(i) annuities do not always provide a good return and;

(ii) invested pensions will, by and large, provider a greater return via growth than any annuity.

If you do decide to explore a Sipp as opposed to purchasing an annuity, you may well avoid a less than favourable return that a particular annuity would provide.  However you also expose yourself to another risk.  Investments are by their nature risky endeavours and their success or failure depends entirely on the economic market: you may well see tremendous growth in your investments, but you could also lose a significant sum.

The UKs overhaul of pension rules presents an exciting opportunity for you to take hold of your pension savings and have real freedom of choice, in terms of what is done with your hard earned savings in your retirement.  However you should take care of your pension pot, whatever you decide to do with it.  Annuities offer a degree of predictability but may not offer be good value, while investments have the potential for both great gains and great losses.  We at Unlock My Pension this that it would be wise for you to take the advice of an experienced advisor who regularly deals with pensions before making any decisions.

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