As with any asset-based investment, there is an element of risk. Pension fund values can drop as well as grow, according to changes in the value of the assets they are invested in. But most other forms of investment don’t have the ability to produce high-enough returns for you to live on in later life. Bank and ISA interest rates, for example, are currently struggling to exceed just 1 or 2%.
Thankfully, however, a range of investment options are usually available to choose from – each one graded from low to high risk, to give you some control over your pension funds.
“For example,” says Neil, “an individual can opt to invest in cash, where the main risk is that the interest returned could be eroded by charges and inflation – so, negative in real terms. Whereas at the other extreme, an individual could select a very high-risk investment fund in commodities or emerging markets, which could result in large losses if the investments don’t perform.
“It’s important to take into account the individual’s attitude to risk, capacity to absorb losses and investment timeframes when choosing funds. Here at Alan Boswell Financial Planners, we tend to utilise funds that invest in a number of asset classes and different geographical areas, helping to lower the overall risk,” he continues.
It’s important to take into account the individual’s attitude to risk, capacity to absorb losses and investment timeframes when choosing funds
“In the longer term, higher-risk assets, such as equities, tend to outperform lower-risk assets, such as fixed interest and deposits. However, there may be periods when equity-based investments suffer heavy losses. Individuals with a long timeframe are likely to be able to ride out these short-term losses and remain focused on their longer-term goals.”