A clear plan for anyone paying into a pension.
The quick answer
- Think long term. Pensions are decades-long. You want growth, diversification and low costs — not day-trading.
- Pick a simple route. Use a ready-made, globally diversified fund or build a basic mix yourself (global shares + global bonds).
- Match the mix to your goal. Shares drive long-run growth; bonds steady the ride.
- Keep fees low. Small percentages eat big chunks over time.
- Within 5 years of retiring? Decide early whether you’ll buy an annuity or draw down. That choice shapes your investments.
Why your time horizon matters
- Shares bounce around in the short term but have historically delivered the highest long-run returns.
- Bonds and cash reduce ups and downs, but usually grow slower.
- Translation: If you’re far from retirement, you can usually hold more in shares to capture growth. As retirement nears, it can make sense to add steadier assets so a bad year doesn’t derail your plan.
Ready-made fund or do-it-yourself?
Ready-made (the easy button)
- What it is: A multi-asset or “target-date” fund that spreads your money across thousands of investments worldwide.
- Why it’s great when starting small: Instant diversification and auto-rebalancing; one monthly payment, job done.
- What to check:
- Asset allocation (how much in shares vs bonds).
- Ongoing charge (keep it low).
- Whether it changes risk as you approach a target retirement date — and if that suits you.
Build your own (still simple)
- Core recipe:
- Global share index fund (growth engine).
- Global bond fund (risk dampener).
- Set your split (example only, not advice):
- Long runway & comfortable with ups/downs? More shares.
- Closer to retirement or hate swings? More bonds.
- Rebalance once a year to your chosen split.
Why asset allocation is the main decision
- Shares (equities): Drive long-term growth; expect bigger short-term swings.
- Bonds: Cushion falls; pay interest; can drop when interest rates rise.
- Mixing them smooths the ride. Your split does more to shape results than any single fund pick.
Fees: what to watch — and why they matter
- Platform or provider fee: What the pension platform charges to host your pot.
- Fund fee (ongoing charge): Cost of running the fund.
- Other costs: Transaction costs, advice fees (if you pay for advice), and one-off transfer/exit fees.
- Impact: An extra 0.5% a year on £100,000 is £500 in year one — and the drag compounds every year. Low cost wins over decades.
Within 5 years of retirement? Decide your path
Your choice changes your investments:
If you will buy an annuity
- You care about locking in a guaranteed income.
- Many “lifestyle” defaults shift into bonds and cash before your target date to reduce last-minute shocks.
- Rising interest rates can lift annuity incomes — but can also push bond prices down on the way there.
If you will use drawdown
- You’ll keep the pot invested and sell units for income.
- You still need growth (so usually some shares), plus defensive assets and a cash buffer (often 2–3 years of planned withdrawals) to avoid selling after a market fall.
- A default glide path that goes too heavy into bonds/cash may limit growth you need to sustain a long retirement.
What happens when you get the mix wrong
- 2022 was a wake-up call. Interest rates jumped, and many bond funds fell sharply at the same time as shares.
- If you were about to draw down and had most of your pot in longer-dated bonds, your balance could have dropped just before you needed the money.
- Lesson: Don’t assume bonds always rise when shares fall. Manage interest-rate risk, diversify, and hold a cash buffer for planned withdrawals.
“Lifestyle” defaults — good fit or not?
- Many workplace and “target-date” pensions automatically move you into bonds and cash as your chosen retirement year approaches.
- Good fit if you’ll buy an annuity at that date.
- Possible mismatch if you plan drawdown (you may need more growth assets for longer).
- Action: Check your default fund’s glide path and switch to a drawdown-friendly option if needed.
A simple setup that works
- Pick your route: ready-made fund or simple two-fund mix.
- Choose your split: shares for growth, bonds for stability; set it to match your time horizon and nerves.
- Automate contributions monthly and increase them after pay rises.
- Keep costs low: compare platform and fund charges.
- Rebalance annually.
- Five years out: decide annuity vs drawdown and tune your mix accordingly.
- At retirement: keep a cash buffer for near-term spending; draw the rest sensibly.
Common mistakes (and quick fixes)
- Sitting in cash for years. Pick a diversified fund; cash is for short-term needs.
- Chasing last year’s winner. Set an allocation and stick to it.
- Ignoring fees. Every 0.1% counts.
- Leaving the default un-checked. Make sure the glide path matches your retirement plan.
- Panic selling. Volatility is normal; design your portfolio so you don’t have to sell at the worst time.
Important
This is education, not personal advice. The right mix depends on your situation, risk tolerance and retirement plan. If you’re unsure, consider regulated financial advice.
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