The company pension only forms part of my overall investments, but it is helpful for my small pigeon’s brain to break it down and consider this individually.
The value that we accumulate in the humble pension vehicle attracts certain benefits (tax relief on contribution, capital gains relief etc) but also suffer at the whims of successive governments (restrictions on when we can get access to the money, restrictions on what we can do with the fund etc).
As I can’t get my grubby hooves on the money anytime soon without a battering from Mr Taxman, it makes sense to me to have my more volatile investments in my pension. This will give the funds time to recover when Mr Market inevitably has a tantrum.
I’ll keep the company pension 100% invested in equity and property funds and away from the less volatile investments like cash and bonds. These more liquid and stable investments will be more useful to me outside a pension fund should I need access to them.
Like many company pension schemes, the investments offered within it are fairly limited. There are a few ‘lifestyle’ type funds that look to automatically rebalance into less risky investments as you approach retirement. Then there are a few geographic based funds, a property fund, a bond fund and a ‘cash like’ fund.
But even with these limited options, the company contribution is quite generous, the Annual Management Charges on each fund are low (typically less than 0.3%) and there is no charge for switching between funds. So despite the lack of choice, the ‘free’ money in company contributions and tax relief make it worthwhile for the moment.
I will stay away from the bond and cash funds (as I will hold these asset types outside the pension) and look to set up a target allocation for the other funds.
I think it is useful to ask ‘why’ you are investing in each fund (or asset class for an overall allocation). Here’s my thoughts on my new allocation;
- UK Equity Fund – 30%. The largest allocation. Should provide real growth in my domestic currency and protect against domestic inflation.
- UK Property Fund – 15%. Invests in both commercial and residential properties directly. Diversification from equities alone but still (hopefully) providing real growth in the long term.
- US / Continental Europe Funds – 15% to each. To provide diversification from the UK economy alone while providing steady growth from developed countries.
- Japan Fund – 10%. Similar to the US and European argument, but should provide further diversification.
- Asia Pacific and Emerging Markets Equity Fund – 6.25% to each. Further diversification into higher risk markets. Hopefully will provide a boost to growth in the long term, but I have kept my allocation relatively low as I’m not prepared to take too much additional risk,
Move the allocation from a global fund into a split I have more sight of, that’s it really.
So that’s it, right? From now to retirement.
The plan is to stick to these allocations over the coming years, and rebalance annual. Exactly how to rebalance I will worry about as that time nears.
I like to think that I am an emotionless investor, plowing money in each month to the perfect strategy that I alone devised. Of course this is utter tosh. For one my resolve has never been tested. I only started investing just before the crash in 2008 and there’s been a nice equity tailwind since then, especially for the UK and the US. When the inevitable crash comes we will see if my mental push-ups have made me strong or will I panic and sell at a low like a lunatic.
Hopefully having an allocation like the above will help me stay mechanical and investing through any market correction or crash.
Writing my thoughts down and actually thinking about my pension has definitely helped me, so I suggest you do the same. NOW.