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Elena, 26

Still in her twenties, time is on Elena's side when it comes to retirement planning. So she's been doing her research, opening savings accounts, and now needs to tackle the pension question. She'd even like to pick the investments herself.

Confidence level: 7 out of 10

"I have been researching how to make better use of my money for a few months now. I think I'm getting the hang of the basics quite well. Since I started, I've opened a Nutmeg stocks and shares ISA account and a savings account that locks cash away. I still want to do more.

"I'm interested in choosing between different stocks and shares myself, and know there are types of pension that let you do just that - it doesn't just have to be in an ISA. Actually, I didn't even realise pensions were investments until recently! It's kind of exciting. Is that weird!?"

My pension planning question...

"I have a workplace pension with Aviva which at the moment is on a default plan (risk level 4 out of 7). I would like to choose my own funds but I have zero experience. What do you recommend I do with this pension?"

Extra details

  • Also has a Nutmeg stocks and shares ISA and a cash savings account

Answer by Scott Moorhouse, Mulberry Bow

Chartered Financial Planner - Meet the experts

Without full details of the client circumstances, the following information should be treated as a generic guide and not advice.

The question which should precede any investment decision is, “what is the money for?”. Clearly your pension is for longer term monies and generally is not accessible until age 55, although this is increasing to age 57 from 2028. Whilst pensions have largely been synonymous with providing income in retirement, they are also an effective vehicle for passing on wealth to the next generation due to them being excluded from an estate for inheritance tax purposes. Without knowing your exact circumstances, it is difficult to comment on this specifically.

As a starting point, we always recommend that clients put aside cash for a rainy day – this could be 3-6 months of expenses (mortgage payments, bills, food etc), however this will be unique to each situation and we have some clients who have 1-2 years. In addition, any known capital expenditure on the horizon should be kept in cash. Beyond this, it can make sense to invest surplus cash/income to try to generate some growth above inflation, to increase your wealth in real terms (above inflation). The rationale behind this thought process is that you want to avoid being forced to sell down investments when the markets have fallen and thereby crystalise a loss.

Assuming that the investments within your ISA and Aviva pension are to amass a pot of monies to support income in retirement, this will help to shape the investment time horizon. With investing generally speaking, time is your friend. That is because the longer the time horizon, the greater the capacity to take risk since you have the ability to ride out the ups and downs in markets, but equally, you are letting compounding reward you. It is often forgotten that upon reaching retirement, the pot you have built up, needs to support income for a long time (often 30-40 years), and therefore there still needs to be an element of risk taken in order to preserve the longevity of your pot.

Caution should be given however, to simply taking undue risk – if you work with a Financial Planner, most will take you through a cash flow planning exercise to help identify the required level of returns needed, alongside your level of contributions in order to achieve the level of wealth to support your retirement plans. The level of risk you take needs to be thought about from multiple dimensions.

It is difficult to comment on the Aviva workplace pension without seeing its current allocations. 4/7 on the face of it would imply a fairly medium risk approach, with somewhere between 50-60% invested in equities, some allocation to fixed interest and some alternatives. Equities are going to be your main engine of growth in a portfolio over time, and it’s possible that in your pension where you have a definitive time period before you can access it, there may be the ability to increase your exposure to equities slightly to try to increase your chances of capital growth. The flipside of that, and as you will have seen earlier this year when COVID shut down world economies, in the short term you could see big falls. If you continue to contribute however, this will enable you to buy more units in a fund at lower prices and therefore, as markets recover, benefit.

Since nobody knows what is going to happen tomorrow (COVID anyone?), it makes sense to diversify and not put all of your eggs in one basket. The Aviva investment plan you are in currently will no doubt do this for you and be managed to give a broad range of exposures. Any investment undertaking by yourself should consider whether you have the time/want the responsibility of monitoring the investment strategy as it may need re-balancing to ensure you do not drift out of line as some funds perform better than others. Investing in funds which give you global exposure to a broad range of asset classes will generally serve you well over time, and most are available at a cost of between 0.2%-0.6%.

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