Raising the stakes!
Your pension is held and managed by a pension provider
They have a range of funds from you to choose from
These funds invest in different things: cash, property, company shares, bonds
The value of your pension fund changes over time: can go up as well as down
You can change the funds your pension money is invested in
If you don’t want to change, can leave it in the ‘default’ fund the pension provider chooses
You should receive a pension statement from your pension provider
The money you’re saving into your pension is firstly passed on to a pension provider to manage on your behalf. These are professional companies, such as Scottish Widows, Aviva, and Fidelity, who specialise in managing pension investments. (You’ve probably seen some of their adverts).
These companies, or pension providers, will
provide you with a range of investment products for you to invest your pension money into. (Crudely put, it’s like walking into Tesco’s or Asda’s, and having a range of breakfast cereals or biscuits to choose from). These products are called funds.
They pool your money - along with that of your colleagues (and other people from across the nation using the same pension provider) - and invest all that money together. You can compare this to taking part in a syndicate lottery at work; or putting money together towards a friend’s stag or hen do; or towards a group holiday.
These funds invest in different things, called assets. These assets can take on many forms: shares of companies; bonds of companies and governments (bonds are a type of I.O.U where a person promises to pay you back the money you lend them, plus a bit extra on top, called interest).
[Continuing with our supermarket example above: you are in the breakfast cereal aisle; some are sweet, some are savoury; some are made of oats, others wheat, gluten-free].
These funds can also invest in property and cash. The assets are chosen by the pension provider’s investment expert, the details of which are provided on their website.
Each fund uses a different strategy in trying to increase the value of your money (i.e. in trying to make you more money, as well as avoid losing it). Some might only invest in companies based in the UK; others across Europe, Asia, America, or a mixture. As such, each fund has different risks attached, and therefore different projected return (what you can expect to make...or lose). So it’s up to you to choose, depending on your preferences.
If it’s too much time, or you find it too difficult to choose, your pension provider will invest your pension in a ‘default’ fund that is designed to suit as diverse a group as possible.
Managing your pension
When your pension is first set up, you will receive a welcome pack from the pension provider, with your customer details and how to login to view your and manage your investment. You can then change your investment from the ‘default’ one to another, or a few. For example, you can have 50% of your pension invested into one fund, 25% in another, and the other 25% in third. This is called diversification (this essentially means not putting all your eggs in one basket).
You want your investments to grow – i.e. make more money – but it’s difficult to achieve this if you only invest in cash or bonds which generally offer lower returns, since they carry lower risk. Cash and bonds typically carry less risk than shares.
Historically, shares have tended to do better than bonds or cash over the long term, but that doesn’t mean it will always be that way. If the economy is not doing well for example, then shares may not perform better than bonds or cash.
Remember, the value of your pension can go up as well as down, depending on how well the funds your pension is invested in do.
Many things can affect the value, such as:
the risk the investments carry;
the health and state of the economy. And not just the UK economy but the economy of other countries around the world can also have an effect;
the reputation of the investment professional that works for your pension provider – these guys are known as the fund managers: they are responsible for managing that pot of money and picking the investment - like picking a horse at Cheltenham or Ascot - so how well your pension does depends on how good (s)he is and his/her track record.
Monitor and review your pension
Constantly review your pension investments, and the funds they’re in.
Keep checking their performance, as this changes over time.
You may not have to change the funds, but it’s worth keeping an eye on them just to be sure, at least every year.
I tend to keep an eye on political, economic and financial news also, to see what’s happening/going to happen, and therefore understand how it may affect my investments. You’ll be surprised how things like politics e.g.) Theresa May (Prime Minister) or Boris Johnson (Foreign Secretary) talking about Brexit (Britain exiting Europe), can affect your investments.
You can check and track your pension with most providers online now. You simply need to set up your customer ID and password, like online banking. Contact your pension provider to help you with this.
Also, you want to check what the charges are on the funds your pension is in, as each fund carries different charges and these can change over time. These charges are admin fees and commission fees you pay for the pension provider managing your investment, similar to how you might pay estate agent/admin fees when buying/renting a property.
Your pension provider will also send you a statement every year to tell you how much is in your pension pot, a bit like your bank statements.
It tells you:
1. what funds your pension is in;
2. how much you have paid into your pension this current year; and
3. how the value has changed from last year, for example.
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