What are the riskiest investments for pension planners?

The objective of most pension planners is to maximise their pension pot, so that they are able to maintain their current lifestyle throughout retirement. And for many, the most effective method of achieving this is by making prudent investments which offer strong returns.

Pension providers usually provide this service for savers. They monitor market trends and make decisions which will facilitate the growth of their clients’ pension pots, whilst exposing them to minimal risks. That said, some people prefer to take a more active role in their retirement strategy and make investment decisions themselves.

Neither approach is wrong, provided that the saver makes informed decisions and seeks financial advice where necessary. However, those making their own decisions should be aware that certain investments could pose more risk than others.

Gated investments 

Gated investments are ones which can essentially block investors from withdrawing their money from an investment fund. Technically, any fund can become gated, but the most common examples tend to be open-ended property fund and of course, the infamous Woodford Equity Income Fund.

The reasoning behind this may be well-meaning on the surface. Indeed, directors may choose to ‘gate’ the fund to protect its value for all shareholders – if too many investors withdraw their money in one go, the value of the fund, as well as people’s investments, could rapidly decrease.

That said, gated investments can be a source of great frustration for many pension investors, leaving them without easy access to their funds. Particularly during the coronavirus pandemic, many people’s employment status changed; research from My Pension Expert revealed that almost one in ten (9%) of adults aged 40-67 were forced to take early retirement because of the pandemic.

Further, retail property funds are typically illiquid, as selling the property itself can be a long and drawn-out process. As such, consumers should avoid this form of risk when they reach retirement. My Pension Expert receives numerous enquiries form new clients who cannot access their pension funds and draw an income because the property fund they are invested in has been “gated”. Returns in a number of property funds have been strong but the success of these funds is ultimately useless if investors cannot access their money when they need to.

Consequently, people who may need quick and easy access to their pension funds should avoid these types of investments.

Illiquid investments

Illiquid investments could also pose issues for pension planners. These are investments which cannot be easily sold or exchanged for cash, without a substantial loss in value. This is usually because there is a lack of investors to purchase the assets once they have been sold.

Common examples of illiquid investments include real estate, cars, antiques, private company interests, as well as some collectables and art pieces. Stocks that trade on over-the-counter markets (i.e. stocks which are traded between two parties, without the supervision of an exchange, as opposed to stock market trading), are also considered illiquid because there are fewer buyers interested in the assets.

These investments can present a great risk to investors, particularly during times of market turmoil. This is because holders of such investments are often unable to unload them at all, or unable to do so without losing money. This can be particularly problematic for pension planners who, especially throughout the market volatility caused by the coronavirus pandemic, might need to rapidly sell such assets or investments in exchange for cash to finance their retirement.

Retirees’ circumstances can change at any time. As such, they should ensure that they are able to access their funds whenever necessary, without them losing value or jeopardising their financial futures.

So, anyone personally managing their retirement strategy should seek independent financial advice. Advisers will be able to assess all elements of a client’s financial situation, as well as their risk appetite, and recommend the most effective investments to suit their needs and goals.

Of course, every investment presents an element of risk. However, investments, particularly when it comes to pension investments, should never carry unnecessary risk. That said, through careful research, and seeking advice where possible, pension planners should be able to invest with confidence and plan for a comfortable retirement.