5 things to think about when choosing investments

1. How long have I got before I retire?

Generally, the longer you have, the more time your investments have to recover from any falls in the stock market. This may mean you feel able to take more risk, but you have to be comfortable with that risk and there’s no guarantee that extra time will ensure recovery from a fall.

Equities (stocks and shares) are long term investments and shouldn't be used for short term goals - as a rule of thumb, five years or more is generally the suggested timescale for investing in equities. 

It’s important to review your level of risk as retirement gets closer as your attitude to risk is likely to change as retirement approaches.

2. What size of income do I want in retirement?

As a rough rule of thumb, with a pension pot of £100,000, you could expect to buy a guaranteed income (annuity) of £4,000 to £5,000 per year* but, this is just a guide and annuity rates can vary widely. If you choose income drawdown rather than an annuity, you may not need as much in your pension pot to achieve the same income but, of course (unlike an annuity), it’s not guaranteed and you’re risking your capital by staying invested.

The higher the income you want to achieve, the bigger the pension pot you’ll need. Generally, this means saving more or taking greater investment risk. If you aren’t comfortable with risk, you may need to revise your income targets. Don't forget that you could run out of money, so make sure that you invest wisely or budget effectively.

*Pensionwise.gov.uk as at 21 June 2018. Based on a pot size of £100,000 and a retirement age of 65. Guaranteed annual taxable income of £4,200 plus £25,000 tax free cash on a single life non-escalating annuity basis.

3. What other savings and investments do I have?

If you have other savings and investments to fall back on, it may be that you can afford to take more risk with your workplace pension. It's important that you only ever take on a level of risk that you’re comfortable with.

4. What falls in value can I handle?

Investment funds can rise and fall in value from day-to-day. So consider what level of short or longer term drop is acceptable to you.

5. How can I manage risk in my pension plans?

Investing in a broad range of different asset classes (for example, shares, fixed interest securities, commercial, property and cash), countries and industries can help lower the overall risk. If you choose your own funds for your pension plan, you’ll need to regularly review your selection to make sure that the level of risk remains right for you.

If this sounds like a lot of work, an alternative is to choose a ‘multi-asset’ investment fund as we described in Your investment choices offering you in-built diversification, designed with the aim to keep risk at a constant level. 

Selecting the right funds to match your goals and attitude to risk is an important decision to make. If you’re at all unsure of what to do, speak to a financial adviser about an investment strategy that’s right for you. If don't already have one, you can find an adviser close to you at unbiased.co.uk(Opens new window)

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