Pension
A pension is a retirement fund for an employee paid into by the employer, employee or both, with the employer usually covering the largest percentage of contributions. When the employee retires, paid in an annuity calculated by the terms of pension.
Pension savers benefit from large tax benefits, which automatically raise their retirement assets, but to truly maximise your income later in life, you must generate the highest possible returns on your contributions. Four years ago, pension freedom reforms added a new dimension to this argument. Nowadays, the majority of savers do not purchase an annuity that pays a guaranteed regular income when they choose to start cashing in their assets, preferring instead to draw money directly from their savings. In that scenario, you'll need to have appropriate investments in place for this stage of your life.
Before and After
To put it another way, investing through a pension is now a two-step procedure. The first phase involves attempting to accumulate as large a retirement fund as possible - this is referred to by financial advisers as the “accumulation” phase. The second stage, commonly referred to as "decumulation" in the jargon, is to invest in such a way that you may protect and even build up additional money while simultaneously earning an income from your assets.
These are two quite distinct goals, but it doesn't imply you need to make completely separate investments before and after your intended retirement date. It is frequently possible to produce income from investments intended primarily for capital growth. Similarly, assets that create a lot of income are often fantastic candidates for growth because you can reinvest the money back into your savings.
So, which investments would be a good fit? According to a recent poll conducted by the stockbroker AJ Bell, six of the ten best-selling investment funds with pension savers were investment companies – despite the fact that there are significantly less of these types of funds available than unit trusts and other comparable “open-ended” funds. When it comes to pension savings, investment firms appear to be punching considerably above their weight.
A Fund for all Seasons
This implies that investment firms may pay consistent – and frequently rising – income distributions to investors, which is advantageous if you want to live off your investment income in retirement. In reality, more than 40 investment companies have increased their dividends in each of the last ten years; in some cases, this record dates back 50 years.
Furthermore, once you reach the point of earning a living, investing firms can be quite beneficial. Unlike other forms of investment funds, they are permitted to retain a portion of the revenue generated by their underlying investments each year in order to support payouts to investors in years when there is less income.
Save Monthly
These sums may appear out of reach for many people, but keep in mind that you will receive tax relief on your donations, lowering the cost. Employer contributions may also be available to you. In any case, even tiny sums of money saved will add up over time, especially if they are effectively invested.
Regular saving works really well in conjunction with pensions. You are investing consistently over a long period of time, and you benefit from a statistical quirk known as pound-cost averaging. The idea is that your fixed monthly contribution buys more of any given investment during months when market prices have decreased, so increasing your returns during the recovery period. You can choose investment businesses through an online fund shop if you already have a SIPP (Self-Invested Personal Pension) set up. More information about SIPPs can be found in the AIC's guide ‘Taking Control of Your Future.'