Earlier this month marked Pensions Awareness Week. The annual campaign, run between 15-19 September, aims to boost understanding of pensions and encourage people to take control of their retirement savings. This is a worthy aim: too many people reach their later years underfunded, leaving them counting the pennies when they should be enjoying the fruits of their working life.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
The first hurdle is doing anything at all. Too often, pension providers will offer up alarmist figures about the vast sums you need to save to be able to live a comfortable retirement. You need a pot of hundreds of thousands to afford luxuries such as boiling a kettle, or switching the heating on. This is unhelpful and can often be based on the most pessimistic of assumptions.
The power of compounding and tax relief
The most important factor to remember is that every penny you save into a pension has a good chance of being worth many times its original value later on, thanks to the combined effects of tax relief and compounding. Let’s look at an illustrative £800 put into your pension at age 30. If you are a higher rate taxpayer and pay £800 into your pension, your pension provider adds £200 in basic-rate tax relief, boosting your total contribution to £1,000. You can then reclaim a further £200 through your tax return, meaning that your £1,000 pension contribution has effectively cost you only £600.
After 10 years, even if that investment has only grown at an anaemic 5% a year – the 10 year performance of the MSCI World index is actually closer to 12%* – that £1,000 will be worth £1,629. By the time you’re 60, also assuming 5% growth, that £1,000 investment could be worth an impressive £4,322. This growth can be a powerful incentive to save as early as possible.
That said, you should be aiming to achieve the highest possible return within your risk parameters. Whether you are investing through a workplace pension, or through your own personal pension, you will need to select the investments that go in it carefully. You could consider a mixed asset investment that can act as a solid ‘core’ to the portfolio. This won’t give you the highest possible return but it will give you a solid, well-diversified option.
Learn more about pensions at Chelsea
Taking more risk over time
If you have 10 years or more to retirement, you can afford to take some risk because you can ride out market volatility. One option is the VT Chelsea Managed Aggressive Growth fund, which invests heavily in stock markets around the world, up to 100% in equities, although it may also invest in other assets including bonds, indirect property, gold and targeted absolute return strategies. Exposure to assets will typically be via open-ended funds, investment trusts and exchange traded funds.
As your portfolio builds and you grow more comfortable with financial market risk, you can build in more exciting options and perhaps take more risk. Rather than selling out of your core holdings, you can simply alter your regular monthly savings. Most personal pension providers allow you to do this with ease. If you get a 10% pay rise for example, you could add another 10% contribution to your pension and bring in a new fund. Alternatively, if you’re lucky enough to get an annual bonus, diverting some of this into your pension is both tax-efficient and good for your long-term wealth.
Striking the right balance in your pension
The next ‘layer’ of investment might be a global equity fund. This can add some oomph to your portfolio, helping it grow faster. It may also bring in more exposure to strong long-term growth themes, such as artificial intelligence or the energy transition. If you’re a more cautious type, the reassurance of a regular dividend can be helpful. For pension savings you will need to pick an accumulation share class to ensure dividends are rolled up. The Fidelity Global Dividend fund or Rathbone Global Opportunities fund are both good options.
If you’re happy to take a bit more risk, then IFSL Marlborough Global Innovation could be a solid option for long-term growth. From there, investors can be more tactical, perhaps taking advantage of shorter-term anomalies in markets. While you should never be ‘trading’ in a pension portfolio, you can look for areas that have been unloved and appear to offer value. At the moment that might include the UK (we like Jupiter UK Dynamic Equity) or emerging markets (we like M&G Global Emerging Markets).
Every pension portfolio needs to strike a balance between preserving wealth for the long term, and taking enough risk to grow your wealth ahead of inflation. Pensions Awareness Week may sound dull, but your future self will thank you for paying attention.
