Time to expand pension investment portfolios?

9 February 2022

Should pension savers consider expanding their pension investment portfolios? There is plenty to be gained from doing so, says Andrew Megson, executive chairman of My Pension Expert

This month looks set to be yet another eventful one for the pension industry. With inflation topping levels not seen for almost 30 years, experts are predicting that the Bank of England (BoE) will increase interest rates from 0.25% to 0.5%.

Although rates are finally rising – a positive move for savings – it is vital that advisers help their clients to acknowledge the fact that rates remain just a fraction higher than their all-time lows. As such, it is vital that individuals are able to factor this into their retirement strategy to make their money work as hard as possible.

In some cases, entering the investment world can be a positive first step in achieving this goal for pension planners. Indeed, investments are growing in popularity amongst those saving for retirement; according to recent research of 550 adults with over £50,000 worth of investments (excluding property they own as their primary residency, or money in savings accounts), over two fifths (42%) of respondents said they prefer to invest their money in assets outside of a traditional pension scheme. Likewise, 44% expect most of their retirement income to come from their investments, rather than a conventional pension.

While it is understandable that individuals are keen to diversify their pension investments to make stronger returns in the current climate, advisers must ensure that pension planners are fully aware of the risks that come with doing so. Put simply, no investment is immune to the financial pressures driven by Covid-19, or economic turmoil in general.

So, what can advisers do to help?

Understanding savers’ motivations

Naturally, Covid-19 has had an immediate and sustained impact on Britons’ personal finances, and many pension savers will be acutely aware of this. Even before the first national lockdown was announced back in 2020, the BoE announced that it would lower interest rates to historic lows of 0.1%. Since then, over two fifth (44%) of UK pension planners have opted to explore riskier investments to ensure that their savings continue to grow, even under tough conditions.

Another key concern for pension planners is surging inflation. Levels currently sit at 30-year highs, with figures expected to reach as high as 7% in April – a concerning prospect for Britons, and one which poses a significant threat to the spending power of their savings for retirement. Such is the danger that 50% of wealthier pension planners consider this as a major risk to their retirement strategy.

Given the considerable obstacles that retirement planners face under the current economic circumstances, one would expect to see many turning to qualified advisers and wealth managers before making any drastic changes to their strategy. However, this is not the case.

The value of professional advice

As things currently stand, just 32% of pension investors have sought advice from an independent financial adviser about their retirement investment strategy. Even fewer (25%) have consulted a wealth manager.

Given the fact that all investments come with an element of risk even at the best of times, pension investors face a unique set of difficulties during the pandemic. As such, these research findings are very concerning indeed – even the most seasoned investors are vulnerable to making rash decisions, which could be detrimental later down the line.

Consequently, more must be done to ensure that pension planners are seeking the appropriate counsel before making any important decisions about their retirement strategy. Advisers and wealth managers, for example, can provide extremely valuable insights which could save individuals from making any ill-advised decisions about their finances.

Considering a person’s risk appetite by weighing any investment opportunities against an individual’s financial commitments and capacity for loss, for example, can be a great help in providing retirement planners with some piece of mind. In truth, not all risks are created equally; should an investment perform poorly, one person’s capacity to take a loss may look very different to another individual’s ability to weather market fluctuations. This is something that shouldn’t be understated, as an IFA or wealth manager will be able to consider exactly which assets and investments would be the most appropriate, based on a varying set of financial circumstances.

Likewise, advisers and wealth managers should be fully transparent with their clients about any potential shocks to the financial markets – for example, news that inflation has risen sharply, or rising interest rates – which may affect their investments, as well as the actions taken to counter these events. Again, this should give retirement savers some reassurance that they needn’t make any drastic decisions unaided or follow through with knee-jerk response to a potentially temporary problem. This ensures that people have the best chance at securing the best returns possible, no matter the economic landscape.

In short, pension planners have plenty to gain by expanding their investment portfolios to help them achieve a stronger retirement outcome. However, it is vital that they do so with an adviser or wealth manager at their side – doing so could just save them from making detrimental investments and boost their chances of a lucrative retirement.

 

Professional Paraplanner