In the last blog we looked at how good the Phoenix workplace pension offering is, but if you are a member how do you even start selecting the investment?
The Standard Life pension has three options for how to invest your pension money. The first option is to let the pension trustees invest you in their choice of a fund of shares. The closer you are to retirement the less they will invest in shares and the more they will invest in lower risk investments such as government bonds. As you approach retirement (7 years before) this blend will gradually move to a point, 3 months from your retirement date, where you will solely be invested in these lower risk investments. This option is called Lifestyling. The idea of this approach is to protect the value of your pension as you approach retirement and is particularly useful if you plan to buy an annuity at retirement. An annuity is the payment of your pension fund to an insurance company in exchange for a guaranteed income for the rest of your life.
The second option is still Lifestyling but instead of letting the pension pick the fund approach for you, you can select one that you feel is better for you. This might be because you prefer a more active approach from the fund that you are choosing but this will come at a cost. This option also requires you to be more involved in selecting and monitoring your pension fund.
Annuities are not right for everyone and you may plan to draw a lump sum or an income from your pension but keep the money invested. This is called drawdown and the Standard Life pension allows you to do this. Drawdown can mean that your pension money will remain invested for decades (between retirement and the day you die) and therefore it is not a good idea to have your fund in low risk assets. So neither of the first two Lifestyling options are likely to be the right choice for a long-term drawdown investor.
This leaves the third option which gives you a range of Standard Life funds to choose from. Your choice might be driven by Ethical or Religious choices and there are funds to cater for this. If not then you will need to select a fund or range of funds that you are comfortable will be right for your pension long-term. The pension offers a range of active and passive funds that invest in shares, government bonds and company bonds. You can blend these together if you are not comfortable taking the level of risk required by investing fully in shares.
