I am able to join my employer’s pension plan but I am told I have to make the decisions about where my contributions and those of my employer are invested. I have no idea how to do this. The brochure they have given me is helpful but I am still uncertain what to do. Can you help?
You are not on your own. More and more these days, a financial adviser advises the employer about the best type of pension plan for their employees but advice does not filter down to the individual employee, although investment advice may be available if you ask for it and usually at a cost to you.
To help the employees, pension product providers often produce brochures that describe the available investment funds and seek to categorise them from, say, cautious through to bal-anced to adventurous. Some go further and apply a more rigorous set of risk gradings.
In addition, sometimes, the solution is to adopt a lifestyling approach, where the provider chooses the appropriate funds for you, usually based on the duration to your intended retirement, and then, over time, changes the fund mix. As you get closer to retirement, the selected funds become more cautious so that any capital gains your pension plan has made are protected as you get closer to retirement.
If, however, you intend to do it yourself, your starting point should be to try to establish a personal attitude to risk, reward and volatility.
This will I am sure be influ-enced by the duration to your retirement age. The younger you are, the greater might be your investment based on shares because, in the long term, these might provide the best prospect for growth.
As you are paying into your employer’s pension scheme on a month by month basis, this will also allow you to take a greater degree of risk because as the share markets fall, as they inevitably do over time, your monthly contributions buy more investment units.
As the markets then rise in value, your investment units rise in value with them – something the financial services sector calls pound cost averaging.
However, you may be fearful of being too exposed in your pension fund to the volatility that comes with investing in shares. You could balance this out a little by investing some of your contributions into less volatile funds such as holding a little in cash-based funds and some in fixed-interest-based funds. These funds, although not without risk, might be considered to be less volatile.
In the past, I might also have listed commercial property as being less volatile. In recent years, commercial property has behaved more like shares but it might still be worthy of consideration for the future.
There is an enormous amount of information available about investing on the internet, in the media and from providers in the form of brochures such as the one you referred to. However, I am going to strongly recommend that you take independent financial advice on this subject.
If you approach a financial adviser and explain the help you need, I am certain they will be able to help you with the definition of your attitude towards risk reward and volatility and guide you to the right selection of investment funds.
This need not cost a lot but it will at least give you the peace of mind you are looking for in making your investment decisions.
Nick Bamford is chief executive of Informed Choice