When it comes to investing for retirement, UK consumers now have more choice than they have had before. For most pension investors, gone are the days of being put into a provider’s default retirement fund and, other than receiving an annual statement through the post about their investments, never really giving their pension another thought. With the advent and adoption of digital wealth managers and online pension providers, consumers have greater choice and control – so, how do you know what the right approach is for your pension?
For most people, after their main residence, their pension will be their biggest financial asset, especially if they start investing for retirement early. With the potential to be contributing to a pension pot over 40 years, where or how your money is invested could make a big difference.
What are the basics for picking a pension investment?
A core principle of investing is that long-term investing is more likely to reap rewards. As money put away in your pension typically cannot be accessed until you’re 55, rising to 57 in 2028, investing for your retirement is likely to be one of your longest investment timeframes. With time on your side, picking the right investment style can focus on choosing the approach that best suits you. And it’s also worth remembering – depending on your provider – you can change the investment approach for your pension when you choose to.
Like any other investment goal, having a diversified investment portfolio for your pension can help mitigate concentration risk – putting your eggs in more than one basket, if you like. At Nutmeg, we have four investment styles to choose from for your pension – all portfolio ranges are globally diversified, built using exchange-traded funds, and adhere to our investment philosophy. So, what’s the difference between the styles? And how do you choose the right one for your pension?
Manage my pension for me
Planning for your retirement can be complicated and picking the right mix of investments can be too. Furthermore, keeping on top of the latest macroeconomic factors that could have an impact on your investments is a full-time job – in fact, it’s the job of our investment team. If you choose one of our fully managed portfolios, our team of investment experts will monitor your portfolio for you – so you don’t have to. They’ll make strategic adjustments to the mix of investments based on news, data and analysis and rebalance when necessary.
Whether you are a seasoned investor or new to investing, for many people there’s a reassurance in knowing that a professional is managing their pension investments for them. In much the same way, many people wouldn’t consider changing the brakes in their car unless they were a mechanic, or building their own extension, our recent research found that, following the pandemic, 27% of UK adults were more likely to seek out a professional to invest their money.1
Pension investing with purpose
Socially responsible investing (SRI) has continued to grow in popularity in recent years. In 2020, SRI was Nutmeg’s fastest growing investment style among new investors (Source: Nutmeg data, 31 December 2020) and research we recently carried out found that a quarter of 25-34 year-olds in the UK said that since the pandemic began, they are much more likely to seek out socially responsible investments.
Through socially responsible investing, you are able to align your investments with your values by giving your money the chance of making significant environmental and social changes in the world. With pensions likely to be a significant financial asset for many, deciding to invest for your retirement in portfolios that place an emphasis on environmental, social and governance factors can have a significant impact on the world you retire in.
Seeking Alpha
As long-term investments, pension pots have many years to benefit from the power of compounding, meaning even small returns in excess of the index benchmark can play a significant role in the size of the overall pot.
As well as seeking returns through the long-term asset allocation and through tactical adjustments to your portfolio, our Smart Alpha portfolios powered by J.P. Morgan Asset Management, have another source of return: smart security selection.
Our Smart Alpha portfolios include not only passive ETFs, but also active ETFs, which use the insights of the J.P. Morgan Asset Management global research team to seek returns in excess of the benchmark. This means the portfolios can take overweight positions (bigger than the index position) where the analysts expect higher returns, and underweight positions (smaller than the index position) where the analysts have a less favourable outlook. Rather than taking large bets on individual companies, they take many small overweight and underweight positions, seeking the small excess returns that can add up over time.
Active security selection allows the investment team to robustly integrate sustainability considerations into the process, by combining exclusions of controversial sectors with active corporate engagement throughout the investment process.
Set and forget retirement investing
While we know cost won’t be the only factor you will consider when picking the right investment style for your pension, we know it may be one of them. Fees can have an impact over time, and high fees can eat away at your pension pot. If you’re younger and retirement is 30 or 40 years in the future and your pension is smaller, you may want to consider an investment style with lower fees – remember, you can always change your investment style later if you’d like more strategic oversight in the future.
Our fixed allocation portfolios are designed to perform over the long-term without ongoing intervention or management by our investment team, with just automatic rebalancing when they deviate from the target allocation. We’ll keep you invested in assets that match your risk level and the investment team will only review the allocation target and assets on an annual basis. We’ve previously described our fixed allocation portfolios as “set and forget”, but there’s real science behind how it’s set. What’s more, at the start of this year we made a number of adjustments to the strategic asset allocation that underpins the portfolios to incorporate greater environmental, social and governance factors.
Choosing the right investment style for your pension will ultimately be a personal decision. It will be determined by the factors that are important to you, both now and in the future. By understanding the investment philosophy that underpins our portfolio ranges and how each range varies from the others, you can make the right choice for your pension. And if you change your mind in the future, you can change your investment style too.
Sources
- All stats unless otherwise stated are from fieldwork conducted by Opinium between 5th February – 9th February 2021 via an online survey, exploring the UK’s attitude to personal finances and investment in the wake of the Covid-19 pandemic. The sample is comprised of 2,000 UK adults, weighted to nationally representative criteria. Age groups surveyed are broken down into the following groupings: 18 – 24, 25 – 34, 35 – 44, 45 – 54, 55 – 64, 65 – 74, and 75 +.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.
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Kat Mann
Kat is the head of PR and savings and investment specialist at Nutmeg and has a passion for pensions, investing and all things financial literacy and financial independence. Having worked in the investment and wealth management industry for over a decade for institutional and consumer investment brands, as well as the consumer champion Which?, Kat has been recognised as one of the most influential women working in FinTech by Innovate Finance for the last two years.Other posts by Kat Mann
