How to diversify your pension investments

Mathilda Volant

by , Content Manager

at PensionBee

12 Aug 2021 /  

White wicker basket filled with quail eggs.

One of the most well known tips for managing your money is the ‘not all your eggs in one basket’ strategy. Simply put, diversification. But why is it good to diversify your investments and what does a diversified pension look like?

Why is it good to diversify your investments?

If you’ve got your pension invested in the same type of investment you’ll be more exposed to the pros and cons of that particular investment. This is because you’ll have no other types of investments to balance those pros and cons. By investing your pension across several types of investments you’ll achieve diversification.

Most pensions are already diversified, across a range of locations and asset classes. This means your retirement savings could be invested in company shares, bonds, cash, property and other assets, across the globe, depending on the plan you’ve chosen.

This approach means that any decline in one type of asset or location can be offset by growth in the others, with the aim of achieving not only balance, but ultimately growth over the long-term.

What a diversified portfolio looks like

All investments fall within groups known as ‘asset classes’.

Some aspects of your investment - duration of investment, growth potential, inflation protection, level of risk, market volatility - will vary depending on the asset class. There isn’t a perfect investment, each has pros and cons.

Here are five common asset classes that your pension might be invested in:

1. Equity

Equity investors use money to buy part of companies, particularly through stocks. Depending on how these company shares perform the investment can rise and fall. If the company performs especially well then they usually pay out small sums of money for holding shares, also known as dividends.

What are the benefits of equity investments?

  • More likely to produce higher returns
  • Likely to grow in line with inflation

What are the downsides of equity investments?

  • Higher level of risk
  • Greater exposure to market volatility

2. Fixed income

Fixed income investors lend money to companies or governments in the form of bonds or debt funds. Often they receive fixed interest initially and are repaid their original investment when the investment duration ends.

What are the benefits of fixed income investments?

  • More likely to produce higher returns
  • Likely to grow in line with inflation

What are the downsides of fixed income investments?

  • Longer duration of investment
  • Higher level of risk

3. Cash

Cash investors save money at a modest interest rate, similar to an instant access savings account. Of all asset classes cash is the most accessible - with the power to purchase anything - yet the most flat in terms of financial growth.

What are the benefits of cash investments?

  • Shorter duration of investment
  • Lower level of risk

What are the downsides of cash investments?

  • Less likely to produce higher returns
  • Unlikely to protect against inflation

4. Property

Property investors have stakes in property trusts and receive gains through commercial or private property income. Often they have a small portion of many properties through a trust, unlike mortgages where you own a large portion of a single property.

What are the benefits of property investments?

  • Likely to grow in line with inflation
  • Lower level of risk

What are the downsides of property investments?

  • Longer duration of investment
  • Less likely to produce higher returns

5. Commodities

Commodity investors use the value of agriculture and raw materials, not companies’ performance, to create gains. These investments depend on the value of core resources like gold and oil in order to create profit.

What are the benefits of commodity investments?

  • Likely to grow in line with inflation
  • Lower level of risk

What are the downsides of commodity investments?

  • Less likely to produce higher returns
  • Greater exposure to market volatility

Getting the most out of your savings

Diversifying your investments can help balance the pros and cons of each asset class.

PensionBee’s most popular pension plan - Tailored - is invested in three core asset classes - equity and fixed income (which are likely to have a higher return) and cash (which is likely to have a lower return).

What makes this plan unique is it invests your money differently as you go through life - which could be suitable for anyone not wanting to make regular investment decisions - moving your money into safer investments as you get older.

You can find out the performance of the PensionBee plans so far in 2021 here.

Planning ahead for retirement

Your pension is a long-term investment. This gives you plenty of time to top it up, track its progress, and plan for your retirement. Doing this for several scattered pension pots could be hard to keep track of, which is why consolidating them into one plan could be worth considering.

About our plans

  • With PensionBee each of our plans is specially designed to suit different savings needs - including our Fossil Fuel Free fund.
  • You can sign up with PensionBee and be enrolled in our Tailored Plan. But you can choose the plan that’s right for you and switch for free at any time.
  • You only pay one simple annual fee taken from your pension pot. Annual fees range from 0.50% to 0.95% depending on the plan you choose.
  • Your fees are halved for any amount above £100,000 to reward saving e.g. our Tracker Plan costs 0.25% for any amount over £100,000.

You can check the diversification of each of our plans and decide for yourself which plan is best-suited to your needs.

Risk warning

As always with investments, with a pension your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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