Investing your pension and the risks

In a world where we’re living longer, more of us are thinking about whether our pension will last us through retirement.

There’re a lot of things to think about when it comes to your pension. How much to put in, how much will you retire on, what are the risks and rewards? Luckily for you, we’ve got it all covered.

First, some fine print. This article can give you helpful information but it isn’t personal advice. If you need to speak to a professional, you can find an independent adviser through Unbiased. Your investments can go down as well as up, and you might get back less money than you put in.

What is a pension for?

In its simplest definition, investing is putting money into an account with the aim to build up long-term savings and potentially make a profit. A pension is a tax-efficient way of investing for your retirement. For most people a pension can help fund later life. You usually can’t access a pension until age 55, (rising to 57 from 2028).

The pension pot you build up over your working life aims to fund your retirement lifestyle. But sometimes, you might find you don’t have as much in your pension pot as you had hoped. Saving as early as possible into a pension can help you build up more over time.

We’ve put together an article all about saving into your pension as early as possible. Read it here.

What does a pension invest in?

When you put money into your pension, you’re investing in the stock market. That’s regardless of whether you have a personal pension (sometimes called a Self Invested Personal Pension, or ‘SIPP’ for short) or a workplace pension.

Here’s what you could invest in when you put money into your pension:

• Shares in individual companies.
• Bonds, which are essentially IOUs for loans. You lend a company some money and you get paid interest until the ‘loan’ is repaid.
• Gilts, which are a type of bond, but instead of lending your money to a company, you're lending it to the government. This makes it one of the less risky types of investment.
• Property, both residential and commercial.
• Commodities such as gold, oil, coffee or even beef. (Seriously, the returns can be meaty.)

A popular way to invest in these things, which are called assets, is in a fund. This is where your and other investors’ money is pooled together and is managed by someone looking after the fund. Many people go down this route when investing their pension. It’s helpful because not everyone has time to keep an eye on the stock market. And it can help spread out risk by diversifying where your money is invested.

Each type of investment has its ups and downs. The amount the value goes up and down is called volatility. Some investments are more volatile than others.

Typically, things like shares have bigger ups and downs – this means higher volatility – and are more likely to result in bigger gains or losses in value.

Things such as bonds and gilts usually have smaller ups and downs – this means lower volatility – and are more likely to result in smaller gains or losses in value. But there’re no guarantees in the stock market, and each type of investment has its own pros and cons.

Knowing how you view investment risk, and what type of investor you are, can help you to make solid decisions about your pension.

How risky is investing in a pension

Whether you invest a small or a large amount into your pension, you can’t completely remove its exposure to risk.

But investment risk isn’t all bad. Read our article about risk to help you feel more confident.

It can feel super daunting when you’re investing into a pension. After all, your pension is a bit like your ‘salary’ in later life. It’s often good to think about the risks from two aspects: planning and investing. Let’s dig in.

Four things to think about when planning for retirement

1. While no one can see into the future, think about the age you’d like to retire. It’s important to consider this as it will give you an idea of how long your money will be invested for. You can decide to start withdrawing from your pension from age 55 – rising to 57 in 2028 - but make sure your pension will cover you for all your needs in later life.
2. Think about how you want to draw on your money in retirement. There’re lots of different options available to you. For example, you can take your pension as a lump sum. Or you can take a little bit now, and keep the rest invested. If you’re not sure which option will suit you best, we’ve written a handy guide all about your pension options which you can check out here.
3. Think about the impact of inflation. Over time, even a low rate of inflation can make a big difference to what your pension pot will provide in real terms. Inflation could impact your retirement income as the amount you need to withdraw may increase to maintain the same standard of living.
4. Think about other savings or sources of income that you might have alongside your pension. These could be short term savings in a cash ISA, or longer term savings in a Stocks and Shares ISA.

What different types of investments can mean for your pension

• Shares can rise and fall in value and generally be more risky than some other types of investments. This is because they depend on the company making a profit. This also makes funds that hold a large proportion of shares, also called equities, more risky.
• Bonds are typically less risky than shares. This also makes funds that hold a large proportion of bonds generally less risky. However, the company whose bonds you invest in can go bust or might not be able to repay the bond. Government bonds (called Gilts) can also be less risky, depending on the country’s credit rating, which means they’re more likely to be repaid in the future.
• The value of the pound compared to other currencies might affect your returns too. This matters where the companies you invest in trade internationally.
• Regularly reviewing your pension plan and investment choices is also super important to ensure a healthy progression towards your retirement by checking that you are on track with your retirement goals.

Can you reduce the risks?

You can never completely remove the risk of investing for your retirement, but you can take some simple steps to reduce it. Here’s a few:

1. Diversification—Not putting all of your eggs in one basket. For example, not investing all of your pension in shares. This is easier to do when you’re investing in a fund, as the fund managers will make sure your investments are diversified for you.
2. Timing your risk—The amount of risk you take on with your pension should change over time. The closer you get to retirement, the less risk you’ll want to take on.
3. Know your goals—A big risk is not knowing what you want to use your pension for. Make sure your pension can cover the standard of living you’d like well into the future, as well as thinking about whether it could cover the cost of long-term care.

Understand risk/reward with our Investment Mix graphic

We talked about timing your risk earlier in this guide. And here’s some more detail on that.

There’s always a risk with investing that you could get back less than you put in. That’s because the stock market can fluctuate.

When you’re younger, you can typically take on more risk. That’s because you have more years to weather out those fluctuations.

But as you near the age you want to access your pension, you might want to think about changing your risk strategy. You’ll not want to take on too much risk, because you’ll have less time to recover any losses before you need to draw on your pension.

We’ve put our investment mix together to give you an idea of what some risk and rewards look like with our approaches. But other providers might have different risk profiles for their pension products.