A pension is one of the most important investments, if not the most important investment, you will ever make. While it can feel functionally straightforward, there are still big decisions to be made on the journey.
For both defined contributions and defined benefit pension holders, the level of admin involved may seem mild but there is work to do along the way.
“Defined benefit (DB) pensions are still the gold standard in terms of pensions,” says Conail Flynn, director of LHK Group. “But some DB schemes may be under strain from a funding perspective. If your scheme is closed to new members, has persistent funding issues and/or there are repeated calls for the sponsoring employer to introduce additional funding, these may be viewed as red flags.”
There are other factors to consider beyond what is going on with the fund itself. Your personal circumstances must be taken into account. All of these can influence decisions, such as investing in an approved retirement fund (ARF).
“Personal factors like health, income needs, risk tolerance, access to other assets such as savings and investments or rental income should guide the decision,” says Richard Hales, pensions lead with Aviva Life and Pensions Ireland. “We recommend that customers consult with a financial broker before making any investment decisions.”
That’s why a pension can’t be viewed purely as a hands-off investment. This is an investment that will have an enormous influence on your life. “It is vitally important that pension savers understand the link between their pre-retirement investment strategy and how they draw down their benefits at retirement,” says Fergus Moyles, head of private wealth strategy at Mercer Ireland
“While retirement happens at a single point in time, it is important to consider your investments as a continuum up to and through retirement. When considering investment strategies, individuals should think of their long-term needs.”
Helena Dorrigan, pensions specialist at Davy, shares this view, particularly due to the potentially life-altering decisions that could be made.
“Many members of group pension schemes are invested in default ‘lifestyle’ strategies, ensuring a transfer from equity-based funds to cash and bonds in the five to 10 years approaching retirement. While this may suit anyone wishing to buy an annuity, more and more retirees are opting to remain invested throughout retirement in an ARF,” she says.
“For those intending to invest in an ARF, it may be more appropriate to remain invested in long-term equity-based funds given that only a portion of your fund, ie your lump sum, will be realised at retirement. It is critical to ensure your pension investment strategy matches your intended retirement strategy.”
That strategy should also take into account the modern reality of how long a pension that a worker is saving for is meant to last.
“On average, we’re living longer so your retirement savings may need to last 20 to 30 years or more. It’s important to avoid drawing down too much too soon, which could increase the risk of running out of money later in life. Keep a diversified portfolio. A mix of assets such as equities, bonds, and cash, can help manage risk and provide growth potential,” says Sinead McEvoy, head of retirement solutions at Standard Life Ireland
“This right balance for you will depend on your risk tolerance and how long you want your money to last. Get professional, regular guidance. Both your needs and market conditions will change over time. Regular reviews with a financial adviser can help ensure your investment strategy and withdrawal levels remain appropriate.”
The common thread is, unsurprisingly, to make sure you get advice regularly. That’s a truism. Avoiding pitfalls is the easiest way to ensure your pension works for you.
“Ideally, people should understand whether they’re likely to have an income gap in retirement well before they reach it. Here, knowledge is power because people have time to make more manageable, meaningful changes to boost their savings,” says Aaron Gaynor, head of workplace financial wellness, employer solutions, at Irish Life. “Whatever you are hoping to do, it’s important to check in and ensure that your strategy is on track for the path you want to take. This is especially important for people who’ll most likely choose an ARF to deliver that element of flexibility when the time comes.”
The big issue, of course, is time. The earlier you start working on managing your pension and getting the right advice, the more you can do to ensure it works for you.
“With a longer time horizon, it’s worth getting advice to understand if your current investment approach is likely to deliver the returns needed to deliver the lifestyle you want over time,” says Gaynor. “Getting trusted expert advice early and checking in relatively regularly can make a big difference.”