For most people, at their normal retirement age, their retirement will last 20 or 30 years. That’s a long time to rely on savings alone. That’s why building and managing a pension is so important. Pensions are not only the most tax-efficient way to save for retirement, but also one of the most powerful tools available to fund your retirement lifestyle. However, how you invest within your pension can make all the difference.
Here are the top considerations we recommend keeping in mind when investing for your pension.
1. Time Horizons Matter
Your investment strategy should reflect how many years you have until retirement. Someone in their 30s has decades to ride out market volatility and can typically afford to take more risk in pursuit of growth. But someone in their late 50s or early 60s may want to reduce exposure to higher risk assets. It is the time to focus instead on capital preservation and steady income. The longer your time horizon, the more growth oriented your investments can be. Over time, equities have historically outperformed bonds and cash, but they also come with greater short-term ups and downs.
2. Diversification Reduces Risk
Diversification means spreading your investments across different asset classes as well as industries and geographic regions. For a pension this usually includes a mix of equities, bonds, property, and sometimes alternatives. By not putting all your eggs in one basket, you reduce the impact of any single market downturn. A well-diversified pension portfolio balances growth potential with stability, smoothing out returns over the long term.
3. Understand Your Risk Tolerance
Risk tolerance is both a financial and emotional factor. Your attitude to risk will also vary depending on your time horizon. Financially, it relates to the level of volatility your retirement plan can withstand. Emotionally, it’s about how comfortable you are with seeing your pension value rise and fall in the short term. A mismatch can lead to costly mistakes and that’s why it’s essential to understand your risk tolerance.
4. Take Advantage of Tax Reliefs
One of the greatest benefits of a pension is the tax relief available. Contributions are deductible at your highest marginal rate (20% or 40%), investment growth is tax-free, and you can usually take up to 25% of your fund tax-free at retirement (subject to limits). Saving, even a little, regularly in a pension means your money benefits from compound interest. This makes it one of the best ways to build a retirement fund.
5. Costs and Charges Make a Difference
Every pension fund has costs, from management fees to investment charges. While these may seem small on paper, they can significantly erode returns over time. For example, a 1% annual fee on a pension pot of €300,000 equals €3,000 per year. Over 20 years, the cumulative effect is substantial. It’s important to understand the various charges on your pension and how they impact your investment and remember they may change over time.
6. Regular Reviews Are Essential
A pension is not something to start and forget. As you move through the different stage of your life, your circumstances, goals, and other external factors change, so your pension strategy should too. Reviewing your pension regularly ensures your investment mix remains aligned with your needs, and that you’re on track for the retirement lifestyle you want.
Next Steps
A pension is a long-term investment but one that should be managed wisely over time. Small decisions you make on an ongoing basis can have a significant impact in years to come. To really put yourself in the best position for a comfortable and financially secure retirement contact our financial services team today to review your pension strategy.
