What Is My Pension Invested In?

The pension is the wrapper — the investments are inside it

This is one of the easiest ways to understand pensions.

Your pension is essentially the tax-advantaged wrapper.

Inside that wrapper sit the investments.

So imagine your statement says:

Personal pension value: £150,000

That does not normally mean £150,000 is sitting in a bank account with your name on it.

It might mean that £150,000 is invested in units of one or more pension funds.

Those funds then own the underlying investments.

Steve's observation

People often tell me:

"My pension is with Aviva."

or:

"Mine's with Legal & General."

That tells me who provides it.

It does not necessarily tell me what the money is invested in.

It's a bit like telling me:

"My shopping is from Tesco."

Fair enough.

But what did you actually buy?

What is an investment fund?

An investment fund pools money from lots of investors and invests it according to a particular objective or strategy.

Instead of personally buying:

• 50 shares in Company A
• 20 government bonds
• a bit of commercial property
• and: some overseas investments,

you may own units in a fund that holds hundreds or even thousands of investments on behalf of its investors.

MoneyHelper explains that pension providers commonly offer investment funds containing mixtures of investments such as shares, bonds and other assets.

That can make diversification considerably easier.

But different funds can have completely different jobs.

One might invest almost entirely in global shares.

Another might hold mainly bonds.

Another might deliberately combine several asset classes.

Another might gradually change its investments as you approach retirement.

So the fund name matters.

What are shares?

Shares — also called equities — represent ownership in companies.

A pension fund might own shares in companies in:

• the UK;
• the United States;
• Europe;
• Japan;
• emerging markets;
• or across the world.

Shares generally offer greater long-term growth potential than some lower-risk assets, but their values can also move significantly.

They can fall sharply.

Sometimes very sharply.

And although markets have historically recovered from many downturns, future recovery is never guaranteed and the timing is unknown.

So if a pension holds a large proportion in shares, you would generally expect more movement in value than a pension invested much more cautiously.

That is not automatically good.

It is not automatically bad.

It tells us something about the type of risk being taken.

What are bonds?

A bond is essentially a form of lending.

You might lend money to:

a government

or:

a company

in return for interest and repayment according to the terms of the bond.

Pension funds may hold:

government bonds

and:

corporate bonds.

MoneyHelper describes bonds as typically lower-risk than company shares and potentially capable of providing more stable returns, although bonds still carry investment risk and can fall in value.

That's worth emphasising.

Lower risk does not mean no risk.

Interest-rate movements, inflation, credit risk and market conditions can all affect bond values.

What about cash?

Some pension funds hold cash or cash-like investments.

Cash normally fluctuates considerably less than shares.

That can make it useful for particular purposes.

But cash has another risk:

inflation.

If your cash grows more slowly than prices over a long period, its purchasing power can fall.

So although cash may feel safe because the number isn't bouncing around every day, that doesn't mean it carries no long-term risk.

Can my pension invest in property?

Potentially, yes.

Some pension investment funds hold exposure to commercial property, listed property companies or other property-related assets.

MoneyHelper also identifies property and commodities as possible components of pension investment funds.

Property can provide another source of return and diversification, but it has its own risks.

Values can fall.

Property can also be less liquid than shares or bonds, meaning it may take longer to buy or sell certain underlying assets.

Again, whether it belongs in a particular pension strategy depends on the wider investment objective rather than simply whether somebody likes property.

What is asset allocation?

This sounds considerably more complicated than it is.

Asset allocation simply means:

how your money is divided between different types of investment.

For example, an imaginary pension fund might contain:

• 70% shares
• 20% bonds
• 5% property
• 5% cash

Another might contain:

• 40% shares
• 50% bonds
• 10% cash

Those two funds could behave very differently.

The first might offer greater long-term growth potential but experience larger ups and downs.

The second might aim for greater stability but potentially offer lower long-term growth.

The exact percentages above are purely illustrative.

They are not recommended allocations.

The important principle is:

the mix matters.

What is diversification?

Diversification means spreading investment risk rather than relying too heavily on one thing.

Instead of having all your pension invested in:

• one company
• one country
• one sector
• or: one type of investment,

a diversified portfolio spreads money across different assets and markets.

MoneyHelper explains that diversification can help balance risk because different investments do not necessarily move in the same direction at the same time.

It doesn't remove risk.

A diversified pension can still fall.

But it can reduce dependence on one particular investment or area performing well.

Steve's observation

Diversification is basically the financial-services version of:

"Perhaps don't put absolutely everything on one horse."

Less exciting.

Usually considerably easier to live with.

Can I be diversified and still own only one fund?

Yes.

This confuses people.

You might only see:

one fund

on your pension statement.

But that single fund might own thousands of underlying investments across different countries and asset classes.

So:

one fund does not necessarily mean one investment.

Conversely, owning ten different funds doesn't automatically mean you're wonderfully diversified.

The ten funds could all own very similar investments.

You need to look underneath them.

What is a default fund?

If you never selected investments yourself, there is a good chance your workplace pension was placed into the scheme's default fund.

MoneyHelper says default or ready-made funds normally spread money across a range of investments and are intended to meet the needs of a broad range of scheme members.

That doesn't mean:

"The default fund is automatically right for me."

It means:

"This was the investment route selected for members who didn't make another choice."

We've already covered this properly in:

What Is a Default Pension Fund?

What is lifestyling?

Some pension strategies automatically change the investments as you approach the retirement age recorded by the provider.

This is often described as:

lifestyling

or:

target-date investing.

Broadly, a strategy might hold more growth-oriented investments when retirement is many years away and gradually move toward more stable investments as retirement approaches.

MoneyHelper notes that many default pension funds follow this type of approach.

This raises a very important question:

What retirement date does your pension think you're working towards?

If it says:

65

and you're actually planning:

60

or:

70,

the investment strategy may be operating to a timetable that doesn't match your plan.

And the way you intend to take retirement benefits matters too.

Someone planning to buy guaranteed income might potentially need a different investment approach from somebody expecting to keep a large part of the pension invested through drawdown.

That does not mean you should change anything yourself.

It means the strategy needs to be understood.

What are active and passive funds?

You may see these terms on pension literature.

Passive fund

A passive investment fund generally aims to track a particular market or index rather than having a manager continually trying to choose which individual investments will outperform.

For example, a passive fund might track an index of shares.

Active fund

An active fund generally has an investment manager or management team selecting investments with the aim of achieving the fund's stated objective, which might include attempting to outperform a benchmark.

MoneyHelper notes that passive funds usually have lower charges, while active funds are designed to try to outperform their relevant market or objective — but there is no guarantee that they will.

Again:

active isn't automatically better.

passive isn't automatically better.

They are different approaches.

How do I actually find out what my pension owns?

Start with your pension provider's website, app or most recent statement.

Look for:

• Investment
• Funds
• Fund selection
• Fund allocation
• Where your money is invested
• or similar wording.

MoneyHelper says pension statements and online accounts commonly show the funds in which pension money is invested and may link to a factsheet for each one.

Find the fund name.

Then find its factsheet.

That should help you identify things such as:

• investment objective;
• asset allocation;
• geographic allocation;
• risk classification;
• major holdings;
• benchmark;
• charges;
• and historic performance.

Some factsheets are wonderfully clear.

Others look like they were designed specifically to discourage normal people from asking questions.

Keep going.

What should I look for on a fund factsheet?

You don't need to understand every number.

Start with:

1. What is the fund trying to do? Look for the objective or investment aim.
2. What does it invest in? Look at the asset allocation. Shares? Bonds? Cash? Property? Something else?
3. Where does it invest? UK? Global? US? Emerging markets? A mixture?
4. What risk level is shown? Providers may use their own risk scales, so understand what the scale actually means.
5. What does it cost? Look for ongoing fund charges and other relevant costs.
6. What has it done historically? Useful information. But remember: past performance does not predict future performance.

Is my pension invested only in the UK?

Possibly.

But many modern pension funds invest globally.

A fund described as:

Global Equity

might own companies from all over the world.

A diversified multi-asset fund might combine overseas shares, UK assets, bonds and other investments.

This matters because people sometimes think:

"My pension must be doing badly because the FTSE hasn't done much."

But their pension might only have a relatively small exposure to UK shares.

You need to know what you own before choosing which market to compare it with.

That's exactly the point we made in:

Is My Pension Performing Well?

Can I choose where my pension is invested?

With many defined contribution pensions, yes.

The amount of choice varies considerably between providers and schemes.

Some give you:

a small selection of ready-made funds.

Others offer:

hundreds or thousands of investment choices.

SIPPs can offer considerably broader investment flexibility.

MoneyHelper notes that defined contribution pension members will often have investment options available, while the range differs between pension arrangements.

But having more choices isn't automatically an advantage.

If you have:

six sensible options

and understand them,

that may be considerably more useful than having:

4,000 options

and absolutely no idea where to start.

We'll cover SIPPs later in:

What Is a SIPP and How Does It Work?

Should I change my investments?

Not because you've just discovered what they are.

This is important.

The purpose of this guide is:

understanding.

Not:

action.

Once you know what you're invested in, you can start asking:

• Does the risk make sense?
• Does it match my timeframe?
• Does the investment strategy match how I expect to retire?
• Are the investments sufficiently diversified?
• What are the charges?
• Has anything important changed?

Then we can consider whether a change is justified.

We'll deal with that properly in:

Should I Change My Pension Investments?

What Should I Do Next?

Log into your pension.

Find the actual investment fund name.

Then find the fund factsheet.

Write down:

• Fund name
• Investment objective
• Percentage in shares
• Percentage in bonds
• Percentage in cash/property/other assets
• Main geographic exposure
• Risk rating
• Charges

You are not changing anything yet.

We're simply answering:

"What do I actually own?"

Once you've done that, there's one obvious question left:

"How much risk am I taking?"

That's exactly where we're going next in:

How Much Risk Am I Taking With My Pension?

Your pension provider is important.

But the investments inside your pension are what actually determine much of its day-to-day behaviour.

If you don't know what's inside, then: performance is difficult to judge, risk is difficult to understand, and whether anything needs changing is almost impossible to decide sensibly.

Steve's observation

You don't need to become Warren Buffett.

You don't need to spend your Sunday reading company accounts.

And you certainly don't need twenty-six screens showing stock-market charts.

But if your pension represents twenty or thirty years of your future income, knowing whether it's mainly invested in: shares, bonds, cash or something else doesn't seem unreasonable.

Understanding comes before changing.

Every time.

You've been paying into your pension for years — but could you tell me what it's actually invested in? Find the fund name first. Then understand what sits underneath it before deciding whether anything needs to change. If you'd like help understanding your pension investments and how they fit into your retirement plans, speak to Open Door Wealth.