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Should you diversify your pension investments?

The 2015 pension freedoms dramatically changed the way in which people approach their retirement finances.

Prior to the introduction of the pension freedoms, there was one main option when preparing for retirement; save into one’s pension pot and, once ready to retire, take out 25% as a tax-free lump sum and use the remaining 75% to purchase an annuity, which would provide a guaranteed income for life.

Today, people are far more diverse when creating their retirement strategies. Indeed, a new survey of over 500 full-time workers in the UK aged over 40 commissioned by My Pension Expert revealed that one in five (19%) plan on using alternative savings mechanisms (such as investments and ISAs) to fund their retirement, instead of a traditional pensions scheme. Interestingly, 18% of over-40s have invested in property with a view to funding their retirement, while a further 12% have invested in art or classic cars for the same reason.  

There is a clearly growing appetite to diversify pension investments. However, whilst the arrival of the pension freedoms has contributed to this trend, there are certainly other factors that have come into play in 2020.

Making savings work harder

There appears to be concern among the population that their savings are simply not working hard enough. This is understandable, given the market volatility in the wake of the coronavirus pandemic and the subsequent recession.

Pension investments have inevitably dropped in response to the economic shock. Consequently, 17% of UK adults over-40 have withdrawn part or all of their pension investments in 2020 because they were losing value.

People are evidently wary of being too heavily dependent on one retirement savings method. However, diversifying pension investments might not be the right option for some pension planners.

Developing the right retirement strategy

Diverse retirement strategies can offer a very effective method of maximising people’s pension funds.

Although, it is important to remember that investing in various stocks and shares, properties or pieces of artwork might not be the right best option for some. Indeed, in an economically volatile environment, many pension planners are keen to react quickly to events, chopping and changing their financial portfolios. However, this can lead to consumers making rash and potentially ill-informed decisions.

For those who are worried about how hard their retirement finances are working, the key is to take into account all existing pension pots and investments, as well as the options that are available to choose from, before then making a decision of where to place one’s savings. Crucially, savers should seek independent financial advice during this process.

The expertise of a financial adviser is invaluable; not only do they analyse the status of a person’s existing pension pot (or pots), but they also take into consideration their wider financial situation, as well as their goals for retirement. From there, a suitable retirement strategy can be created.

For some, this may include alternative pension saving methods, such as investing in the stock market or a second property. For others, it may be more effective to take the more traditional savings route, such as a personal pension plan, on top of a workplace defined contribution pension.

There is no “right” way to save for retirement. However, the key is for people to take their time when deciding on their own approach and, importantly, to seek advice where possible.