Investing your pension

Should you invest your pension pot or keep it as cash? Learn about important things to consider when looking to grow your retirement savings.

Is it better to keep your pension as cash or invest it?

Keeping high levels of cash in your pension over the long term lets inflation eat away at the value of your savings over time. This can have an even bigger effect if you’re just starting out saving for your retirement.

Numerous studies back this up. Here’s a handy chart to show the yearly return of cash vs the rate of inflation over the last 10 years.

Source: Barclays Equity Gilt Study 2023

The same study also showed that over the last 20 years, cash lost 1.1% a year on average when compared to the rate of inflation, whereas investing in the shares over the same period delivered 2.9% a year over and above the change in prices.

Learn more about how much you might need in a pension, as well as other accounts designed to help you save for retirement.

How to invest in your retirement

So, you know that investing can help grow the money you pay into your pension (including any tax relief) over the long term. But now you’re wondering what to do next and how to make the best investments for retirement.

If you’re employed, chances are some of your retirement savings are already invested for you via your workplace pension. But if you’ve set up your own pension, like a self-invested personal pension (SIPP), you’ll need to choose your own investments for the cash you pay into it.

Just keep in mind that investing a pension is something you do for the long term. You’ll need to reach age 55 before you can take any money out of your personal pension, and this is rising to 57 in 2028.

The Pension builder fund is available in both types of pension account we offer at AJ Bell.

In our SIPP, you can choose the fund to invest your pension cash, and even hold it alongside other investments in your SIPP.

In our Ready-made pension, the Pension builder fund is one of the four AJ Bell fund options.

The fund won’t be for everyone and isn’t tailored to your specific needs or goals. By offering the Pension builder fund or any of our investment ideas, we’re not giving you financial advice. If you need help with finding a pension or investment for your needs, please contact a regulated financial adviser.

What is a default pension fund?

Workplace pensions (set up by employers for their staff) have a default fund, chosen by the employer and scheme to meet the needs of most staff. It’s a similar concept to our own Pension builder option, but in workplace pensions, the money you and your employer pay into it will automatically be invested into this fund, unless you choose something different.

You might want to ask your workplace pension provider what fund options are available. Even if you choose not to change to something else, it’s good to know where and what your pension is invested in.

Things to consider when investing

1) How often do you want to invest?

Will you be paying in a lump sum or setting up regular monthly payments into your pension? Either way, you’ll need to decide and set up how often to invest the cash you pay in.

For regular payments, most providers will have a regular investment service you can set up for individual investments, automating the process for you each month. This saves you having to remember to make your pension fund investment every single month, and is likely to be cheaper when compared to doing it all manually.

With a AJ Bell Ready-made pension, we’ll automatically invest and money received into your chosen AJ Bell fund.

2) Investment risk vs return

Different types of investments come with different levels of risk and potential returns. As we’ve mentioned, even cash has its risks – mainly in the form of inflation eating away at its value. Bonds are typically thought of as less risky than shares but are still affected by things like interest rates, inflation and the risk of a government or company failing.

Investing a pension in the stock market does give it the best chance of growing in value over time, but the price of shares and similar investments can move significantly in the short term. The further you are away from retirement gives you more time to ride out dips in the market and reap the reward from investments with greater risk. But you still need to think about how you’ll feel along the way, and if you’d be comfortable with the risk.

For example, if you think you’ll find it very hard to focus on your retirement goals and keeping your pension invested when its value is constantly changing, you might prefer to take less risk overall with your investments. This typically involves aiming for a smoother journey, even if it means gaining less in potential overall returns.

Learn more about investing risk and returns.

3) Spread your risk

Whatever route you choose, it’s important not to put all your pension eggs in one basket. You might hear this called diversification and it involves spreading your money across different types of investment.

The aim of diversification is to reduce the impact on your pension pot if one investment (let’s say a single company) takes a hit. If you were invested in a range of investments, that company’s poor fortunes would have far less of an impact on your overall pension value than if your whole pot was invested in just those shares.

A common way to diversify is by investing in funds. Funds combine the money from their investors and spread the total across many different holdings. Depending on the fund’s objective, it could invest in one specific area or type of investment (for example the biggest UK companies), or it could be a ‘multi-asset’ fund. Multi-asset funds take advantage of the fact that different asset types tend to perform differently across the economic cycle, which in theory should smooth your returns.

Not only does investing a pension in funds help you diversify and spread your risk, but you also don’t have to research lots of individual companies and investments yourself. You’ll pay an annual ongoing charge to a fund manager to deal with all this, so you don’t have to! The ongoing charges figure, or OCF, includes the costs of the underlying investments and any management fees.

4) Keep an eye on fees

High investment fees can eat into the return your pension pot enjoys, and the impact of high fees can add up over time. Getting to know the total fees you’ll pay for your pension means you’ll get the best value for the features you need.

Some pensions may charge an all-in-one total fee for your account and the investments in it, like our AJ Bell Ready-made pension. While for other pensions, like our AJ Bell SIPP, you’ll usually pay a lower account admin charge, with separate charges for the investments you choose, including dealing fees and ongoing charges.

Fees can also differ between the funds you invest in within your pension, as they can have different management styles. If you believe a fund management team can outperform the sector you’re looking to invest in, you might choose an actively managed fund.

Intuitively, actively managed funds will carry a higher management fee than a ‘passive’ fund. Passive funds (such as index tracker funds or ETFs) don’t aim to outperform the market or index they’re tracking, and usually cost far less as a result.

5) Review your investments

You should regularly review your pension investments to check they still match your retirement goals and the risk level you’re comfortable with. But it’s best not to check on your investments every day. Many people check in with their pension every three to six months to see if they’re still on track, and your provider will also send you a pension statement once a year.

Open a pension

An AJ Bell SIPP gives you complete flexibility on how much you save for retirement, and when and where your pot is invested.

Open an account

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