Not everyone feels confident enough to choose from the full range of available investment funds for themselves. With something like 2,000 possible choices to go at, it’s hardly surprising if you wouldn’t feel sure where to begin.
In reality, most people invest their savings in funds managed by professional managers. Sometimes, this is a conscious choice, but in other cases – such as where a workplace pension is invested in a default fund – people may not even realise that this is the choice they’re making.
In this article we look at workplace pension default funds and ready-made portfolios to help you understand how these solutions work.
Workplace pension default funds
A new system called automatic enrolment began in 2012. This requires employers to automatically enrol all eligible employees into a workplace pension. The system will be introduced by all employers by 2018.
Every automatic enrolment workplace pension is required to have a default fund – i.e. a fund into which employees are invested without their having to make an active choice.
Because they have to cover such a wide range of people, default funds need to be designed as a ‘best fit’ for everyone who joins the pension scheme. For this reason, default funds are typically low to medium risk – and lower to medium potential reward – because this fits in with the risk tolerance of the average member of most workplace pension schemes, and the UK population as a whole.
Even although new joiners of workplace pension schemes are defaulted into one particular fund, in most workplace pension schemes the employee will have the choice of picking their own fund(s) if they want to.
If the default fund does not match your risk and return ambitions, consider switching to another fund or portfolio of funds that does.
Ready-made portfolios of funds are available on most online saving and investment shops (also called ‘platforms’). People who save and invest via money shops are typically using:
- Individual savings accounts (ISAs) for flexible saving
- Self-invested personal pensions (SIPPs) as a means of:
o Saving for retirement
o Consolidating their existing pension pots, or
o To draw income or capital in retirement.
Ready-made portfolios focus on the saver or investor’s ‘attitude to risk’. In simple terms, attitude to risk is how much volatility you are prepared to accept to achieve your goals.
Generally speaking, the more risk (and volatility) you take, the potential for better returns on your investments. However, it doesn’t always work out like that and you might need to invest over a long timescale for this maxim to hold true.
If the thought of your retirement savings falling 20% or more in one year would give you nightmares, choosing a portfolio of funds with a medium-high or high risk outlook isn’t for you. And, even if you do have a high tolerance for risk, taking excessive risks as you approach retirement may prove to be foolhardy.
On the other hand, you may have other savings which you can afford to take more risk with. These might be savings that are not earmarked for any particular purpose and which you don’t have any immediate need to access.
Horses for courses
So, in short, you may adopt a different attitude towards risk and volatility for different savings pots that are earmarked to provide for different events in your life.
In the case of ready-made investment portfolios, once you have decided how much risk you want to take with your savings and investments, you leave investment experts to do the rest. They will place your savings into a portfolio of investment funds that matches the risk tolerance you have expressed.
The risk choices usually fall into four or five different categories, ranging from low risk to high risk. The investment portfolios that match your choices are then constantly readjusted to ensure that they stay within your chosen risk tolerance.
Need to gain a better understanding of your attitude towards risk? Visit our Understanding risk page to find out more.
The value of investments can fall as well as rise and you may not get back the amount invested.
If you are unsure of your options we recommend you speak with a financial adviser who can give you a personal recommendation.