Should I Change My Pension Investments?

First — remember what a pension actually is

A defined contribution pension is not normally a savings account.

It is a:

tax-efficient pension wrapper containing investments.

Those investments might include:

• shares
• government bonds
• corporate bonds
• property
• cash
• or: a mixture of different assets.

We covered this in:

What Is My Pension Invested In?

So when your pension value moves:

it is usually the investments inside it that are moving.

Why has my pension gone down?

Because investments fluctuate.

If your pension owns shares or other market-based assets, their values can rise and fall.

A fall does not automatically mean:

the provider has done something wrong

or:

the fund is broken.

MoneyHelper currently reminds pension savers that DC pensions are invested and that investment values can fall as well as rise.

The important questions are:

• What caused the fall?
• How much risk was the fund supposed to take?
• How did similar investments behave?
• What timeframe are you judging?
• and: Has anything fundamentally changed?

Don't judge a pension investment from one year

Suppose a pension fund falls:

8%

over one year.

That feels uncomfortable.

But on its own, it tells us very little.

We need to know:

• what the fund invests in
• its investment objective
• the risk being taken
• what markets did
• and: how it has behaved over an appropriate period.

A long-term equity-based pension will normally behave differently from a cautious bond-heavy fund.

Comparing them purely by:

"which one went up most?"

is not useful.

We covered this in:

Is My Pension Performing Well?

Should I move after my pension has fallen?

Not automatically.

Imagine your pension falls from:

£100,000

to:

£85,000.

You become nervous and move everything into cash.

The £15,000 fall has now happened.

If markets subsequently recover, your cash does not automatically participate in that recovery in the same way.

MoneyHelper specifically warns that selling or switching while prices are low can crystallise losses.

That does not mean:

"never change investments after a fall."

It means:

do not change purely because a fall has frightened you.

The decision should be based on whether the investment strategy remains appropriate.

Steve's observation

The investment world has a wonderful ability to make people do things backwards.

When something has gone up enormously:

"I need to buy it."

When something has fallen:

"Get me out."

Which can translate into:

buy expensive, sell cheap.

Not traditionally considered the ideal investment strategy.

What is my investment supposed to do?

Every pension investment should have a job.

Perhaps the goal is:

• long-term growth
• balancing growth and stability
• reducing large fluctuations closer to retirement
• or: supporting withdrawals throughout retirement.

If you cannot explain the purpose of your current pension investments:

start there.

Ask:

"Why am I invested like this?"

Not:

"Which fund made the most money last year?"

Is my risk level still right?

Risk changes in importance depending on:

• your timeframe
• your objective
• and: your ability to cope with losses.

We covered this in:

How Much Risk Am I Taking With My Pension?

Someone 30 years from retirement may have a very different investment timeframe from someone planning to use a large part of their pension next year.

But age alone does not determine the correct strategy.

Someone entering retirement through drawdown may remain invested for decades.

Someone planning to buy an annuity or take a large lump sum might have a different objective.

So:

retirement age alone isn't enough.

You also need to know:

what you intend to do with the money.

What is capacity for loss?

Your:

attitude to risk

is about how comfortable you feel with investment fluctuations.

Your:

capacity for loss

is about what would actually happen to your financial plan if those losses occurred.

Those are different.

You might feel perfectly relaxed about a 25% market fall.

But if that fall means:

your retirement income no longer covers essential spending,

that matters.

Equally, someone may emotionally dislike investment falls but have:

• significant guaranteed income
• cash reserves
• and: other assets.

That can make their financial capacity different.

Am I diversified?

Diversification means spreading money across different investments rather than relying heavily on one company, market, country or asset type.

A diversified pension fund might contain:

• UK shares
• international shares
• government bonds
• corporate bonds
• property
• or: other assets.

MoneyHelper highlights diversification as an important way of balancing investment risk, although it cannot prevent losses.

One diversified fund might provide substantial diversification.

Owning eight different funds does not automatically mean you are better diversified.

They might all own many of the same investments.

Do I need more funds?

Not necessarily.

This is another common misconception.

People log into a pension and see:

200 available funds

and think:

"I'm only in one. That can't be right."

It absolutely can be.

A single diversified multi-asset or global fund could potentially contain hundreds or thousands of underlying investments.

The number of funds is not the same as the number of investments.

Steve's observation

Having twelve pension funds can look impressively sophisticated.

It can also mean you've accidentally bought the same 50 companies six different ways.

Complexity is not automatically clever.

What is a default pension fund?

Many workplace pensions automatically invest members in a:

default fund.

That does not mean:

bad fund

or:

beginner fund.

It means the scheme has selected an investment strategy intended to provide a suitable default approach for members who do not make their own investment choice.

MoneyHelper notes that many people remain in their pension's default fund and that these funds are often professionally managed and diversified.

For many people:

that may be entirely appropriate.

But:

default does not mean "never check it."

What should I check in a default fund?

Find out:

• what it invests in
• what risk it takes
• whether it changes over time
• what retirement date it is using
• and: what retirement outcome it is designed around.

The last two become increasingly important as retirement approaches.

What is lifestyling?

Some pension strategies automatically change investments as you get closer to a selected retirement age.

This is often called:

lifestyling

or:

de-risking.

Broadly, the strategy may gradually move money away from higher-volatility assets and towards investments intended to suit the pension's assumed retirement destination.

Historically, some strategies were built with annuity purchase in mind.

But modern pensions can be used in several different ways.

MoneyHelper currently advises consumers to check whether their pension's investment approach still matches how they intend to use the pension, particularly where a lifestyle strategy is involved.

Why does my selected retirement age matter?

Because some lifestyle strategies use it as a trigger.

Imagine your pension thinks you're retiring at:

60.

But you've decided to work until:

68.

The investment strategy may start changing eight years earlier than your real plan requires.

The opposite could also happen.

Perhaps the pension assumes:

67

but you intend to access it at:

60.

Now your investment strategy may not be aligned with your actual timetable.

Check it.

Does lifestyling mean my pension becomes safe?

No.

Lower-risk does not mean:

no risk.

Bonds can fall.

Cash can lose purchasing power to inflation.

Other supposedly defensive assets can fluctuate.

The purpose is generally to change the nature or level of investment risk.

Not abolish it.

What if I plan to use pension drawdown?

Then your investment timeframe may continue well beyond your retirement date.

If you enter drawdown, part of your pension might remain invested for:

10

20

or potentially:

30 years or more.

The appropriate strategy may therefore need to consider:

• future withdrawals
• investment growth
• market falls
• inflation
• and: how long the pension may need to last.

We cover this in:

What Is Pension Drawdown and How Does It Work?

and:

How Long Will My Pension Last in Retirement?

Retirement does not automatically mean:

investment ends.

What about sequence-of-returns risk?

If you're withdrawing from an invested pension, the order in which investment returns occur can matter.

Large falls early in retirement combined with withdrawals can be particularly damaging because money is being removed while the portfolio is down.

That can reduce the amount available to benefit from any later recovery.

We cover this further in:

What Happens to My Retirement Income if Investments Fall?

This is one reason why investment strategy approaching and during retirement needs more thought than:

"I'm 60 now, so make everything safe."

Should I change into whichever fund performed best?

No.

Past performance does not reliably tell you which investment will perform best next.

The fund at the top of this year's table could be:

• high risk
• very concentrated
• or simply: invested in a market that had a particularly strong year.

By the time everyone notices:

the strong performance has already happened.

Changing purely on that basis is:

performance chasing.

And it can lead to repeatedly moving money into investments after prices have already risen.

Should I change funds because markets look frightening?

Again:

not automatically.

Headlines are designed to get your attention.

They are not designed to manage your pension.

Markets regularly experience:

• uncertainty
• recessions
• wars
• elections
• interest-rate changes
• and: unexpected events.

That doesn't mean ignore what is happening.

It means don't redesign a 30-year pension strategy every time the television gets excited.

What if my circumstances have changed?

Now we have a much stronger reason to review the strategy.

Perhaps:

• your retirement date changed
• your retirement objective changed
• your income changed
• your other assets changed
• your capacity for loss changed
• your health changed
• or: you intend to take the pension differently.

Those are real planning changes.

An investment strategy built around your previous circumstances may therefore need reviewing.

What if the fund itself has changed?

Also worth checking.

A fund can change:

• investment objective
• manager
• asset allocation
• risk level
• charges
• or: investment approach.

That doesn't automatically mean you should leave.

But if the reason you originally selected the investment no longer exists:

review it.

Do charges matter when switching?

Yes.

Pension investments can have:

• fund charges
• and potentially: transaction, dealing or switching charges.

MoneyHelper warns that some pension arrangements may impose costs when investments are bought, sold or switched.

You therefore need to compare:

the cost now

with:

the cost afterwards.

But do not make charges the only criterion.

A cheaper inappropriate investment is still inappropriate.

Active or passive?

Neither is automatically superior for every investor.

An:

active fund

uses investment decisions made by a manager or team in pursuit of its stated objective.

A:

passive fund

generally aims to track a specified market index or benchmark.

They can differ in:

• cost
• investment approach
• risk
• and: performance behaviour.

The question isn't:

"Which philosophy is right?"

It is:

"Does this investment appropriately contribute to my pension strategy?"

Should I manage my pension investments myself?

Some pensions allow substantial investment choice.

That does not automatically mean you need to use it.

MoneyHelper notes that people choosing their own pension investments need to understand risk, diversification, charges and the additional responsibility involved.

If you enjoy investing and understand what you're doing:

greater involvement may suit you.

If you have no interest whatsoever:

a diversified managed or default solution might be more appropriate depending on the circumstances.

There is no medal for pressing more buttons.

Beware of pension investment scams

Be extremely cautious if someone contacts you unexpectedly and says:

your pension is underperforming

and:

they know where you should move it.

Warning signs can include:

• guaranteed high returns
• pressure to act quickly
• unusual investments
• unregulated schemes
• or: promises of early pension access.

MoneyHelper specifically warns consumers not to change pension investments because of unsolicited approaches, pressure or guaranteed-return claims.

Your pension has taken years to build.

It does not need to make an urgent decision because somebody rang you on Tuesday afternoon.

A Simple Pension Investment Review

Before changing anything, answer:

1. What am I invested in now? Find the actual fund names.
2. What is the investment objective? Growth? Stability? Retirement preparation?
3. What assets does it hold? Shares, bonds, property, cash or a mixture?
4. How much risk am I taking? And what would a substantial fall mean for me?
5. Am I diversified? Or heavily reliant on a narrow area?
6. What is my timeframe? When will I realistically need the money?
7. How will I take my pension? Cash? Annuity? Drawdown? Combination?
8. Is my selected retirement age correct? Especially if lifestyling applies.
9. What charges am I paying? And what would switching cost?
10. What exactly has changed? My circumstances? The fund? Or just this month's headlines?

What Should I Do Next?

Before changing your pension investments:

write down why.

Not:

"because markets are bad."

Not:

"because another fund went up more."

Write something specific.

For example:

• "My retirement date has changed."
• "My current fund takes more risk than I can afford."
• "My lifestyle strategy is aimed at an outcome I no longer intend to use."
• "My circumstances have materially changed."

Then compare:

CURRENT STRATEGY

with:

PROPOSED STRATEGY.

What changes?

• Risk?
• Diversification?
• Charges?
• Investment objective?
• Retirement alignment?

If you cannot explain why the proposed strategy is more appropriate for your actual plan:

you may not yet have a reason to switch.

Changing a pension investment is easy.

Usually: log in, find fund, press switch.

The difficult part is deciding whether you should.

Steve's observation

Your pension does not need to win:

Fund of the Month.

It needs to help fund:

your retirement.

Those are completely different competitions.

So don't chase yesterday's winner.

Don't panic because markets fell.

Don't assume default means bad.

Understand what you own.

Understand the risk.

Understand what job it is supposed to do.

And only then decide whether anything actually needs changing.

Found your pension investments but have no idea whether they're actually right for you? Start by understanding what they invest in, how much risk they take and whether they still match your retirement plans. If you'd like help reviewing how your pension investments fit into your wider retirement strategy, speak to Open Door Wealth.