So you have a private pension and are unsure as to what pension funds to pick. We would always recommend you see the advice of a pension specialist or an ifa when it comes to such important decisions but below you will find an overview of what options are available with regards to private pension funds with personal pensions, stakeholder pensions and SIPPs, as well as some important points to consider.
Pensions funds – where to invest?
Stakeholder Pension Funds
Most pension providers have a set range of funds available for investment. For stakeholder pensions there will be a limited range, usually around 25 funds however, some stakeholder pension providers offer up to 40+ funds.
With Stakeholder pensions, the funds available are most likely to be what is known as ‘internal funds’ i.e. say for example you had a stakeholder pension with Aviva the majority of these funds will be managed by Aviva. Some Stakeholder pension providers offer limited access to ‘external funds’ i.e. funds managed by fund management companies such as ‘Blackrock’.
Personal Pension Funds
The main difference between personal pension and Stakeholder pension is not only overall cost of the pension plan but also the range of pension funds available. A good personal pension plan will have access to over 100+ pension funds with the majority of the funds available being ‘externally managed’ funds. For some, the potential of greater annual returns outweighs the disadvantage of the greater annual charges associated with such pension funds.
SIPP Pension Funds
A SIPP pension is basically a personal pension with the ability to hold other alternative investments such as commercial property. A good SIPP contract should offer access to a large range of ‘external funds’, much the same as a personal pension.
Pension funds and Asset classes
All private pension funds are categorised under different asset classes. A good pension adviser would recommend funds from the majority of asset classes. In doing so, you’re pension adviser is spreading any potential risk. The following should illustrate this point more clearly
Say for example your private pension is invested 100% in UK property funds and you don’t benefit from investment in any other asset class. You may have done this because the UK property sector was doing well and as such UK property funds were providing great returns. Now say you are approaching retirement and the UK property sector stagnates and as a result your pension drops in value by 35%. If you had spread your pension fund amongst other asset classes this problem is likely to not have occurred, for example you may only have seen a drop of 10%.
Below is a list of the major asset classes. Please be aware that some asset classes may not be suitable for some investors. For example, the ‘Asia exc. Japan’ sector may provide great returns however, it is deemed a high risk sector and would not be suitable for a ‘cautious’ investor.
- Fixed Interest
- UK Equity
- Europe Exc. UK
- North America
- Asia Exc. Japan
Lastly, the following pension funds are becoming more available with private pension plans and should also be considered
Tracker funds are basically funds that track certain indices. An example could be a FTSE 100 Fund, basically this fund would track the FTSE100 and as such would increase and decrease more or less in line with the FTSE100. The major benefits of such funds is that as they are not managed they have low annual charges
A lifestyle fund adapts to your stage of retirement planning. Basically, as you approach retirement, the risk of the fund decreases. It may do this by increasing its holdings in cash and the premise behind this is that the risk of the fund decreases as you approach retirement and that your private pension is less likely to suffer any great decrease in value at the point you wish to take benefits.
Some important points to consider with regards to private pension funds
- Unless you are absolutely sure that you are capable, you should always seek advice from an IFA or pension specialist. There are many pension specialist companies that operate online and as such you can obtain all the advice you need over the phone without the need to physically visit an adviser
- Many pension providers fund offerings differ, and as such you should research different pension providers to see who offers the best range of funds
- Private pension funds should not be picked solely on their past performance alone. There are few pension funds that provide great returns year in, year out.
- A more important consideration should be diversifying risk by investing in a range of funds across different asset classes.