Am I saving enough for my pension? Part II – How to invest

Where should I put my retirement savings?


Inspired by a question in the moneystepper Facebook group, this article follows on from a previous article discussing pensions and how much to save into your pension whilst you are working.

After reading that article, I know that everyone has spoken to their employer and asked to maximize their pension contribution and obtain the highest level of matching from their employer!

Now what? Now, they will ask you where you want to invest this pension pot. Here is where it gets confusing!


Investment options

When I signed up to my employer pension scheme, I was sent a letter by the pension provider asking me to allocate my pension funds. Over the course of the next tens of pages, there were 165 funds listed with every name you could think of, with letters, numbers, percentages, asterisks and any other symbols imaginable.

This must be confusing even for the people who created pensions, never mind your average employee.

Well, what do all these mean?



A good starting point in understanding this list is to define what a “fund” is.

A fund pools together the money from many individuals and the fund manager uses it to invest in a broad range of assets. Their aim is to help you grow your money and, if required, provide you with a regular income.

The suggest advantages of funds is that you get to benefit from the fund manager’s supposed knowledge and obtain better than market returns. Unfortunately, this isn’t necessarily the reality.

If we look at the statistics, the returns on “actively managed funds”, i.e. where fund managers attempt to pick stocks, time the markets, change asset allocations based on macro-economic events, etc etc, perform much worse than “passive funds” – funds which simply track the underlying indices and require little management, including tracker funds and ETFs.

For example, a recent report shows that for Canadian, U.S. and international equities, a staggering 89.7%, 94.4% and 88.9% of the actively managed funds respectively failed to beat their comparative indexes.

Why is this? Well, it’s mainly because of fees and charges. As I’m sure you know it costs to trade. And it costs to manage the funds. And these costs and charges are included in the fund’s returns, thereby reducing the return you eventually receive.


Independent of the type of fund, fees can vary significantly. For example, the TER (Total Expense Ratio) on the funds I am offered in my company pension scheme range from 0.19% to 2.5%.

And the impact of these fees stacks up quickly. Research from Which highlights that £10,000 invested in a fund with no charges, growing by 6% annually for 20 years, would return £32,071.

However, if you invested in a fund with the industry average charge of 1.67%, your return would only be £23,344. Therefore, for a fee which many people might just consider as “a couple of percent” actually costs you £9,000 in charges. If the TER was 2.5%, £12,000 would be paid out in charges (120% of the original investment amount of £10k).

And this doesn’t even include the impact of transactional charges occurred when funds do a lot of buying and selling!

Therefore, if managed funds can’t beat passive funds and fees impact your return so significantly, it seems that investing in tracker funds and ETFs would be the most sensible approach for your pension portfolio.



You now need to choose your tracker fund or ETF. Given that these will essentially mirror the underlying market, there should not be a great difference between providers. Therefore, you should probably look to the smallest TER to choose.

However, what will differ is what market you should invest in. This is where it gets complicated and where your own judgment comes into play. However, this is also where, in my opinion, it gets interesting and fun!

There are tracker funds and ETFs which track everything and everywhere!

I recently posted on the rise of emerging markets. You may want to invest in these. However, they pose a greater degree of risk. Therefore, how you spread your investments will essentially come down to your “risk appetite”.

This is most easily summed up by the answer to the following question:

How would you feel if your pension pot fell by 20% over the next 10 years?

Your answer to this question will effectively dictate where you allocate your investments.

If your response  is “I would want to kill myself” or “I am retiring in 8 years so that would be a disaster” or “Nooooooooooooooooo”, then you will want to invest in very stable assets and markets (UK and US main market indices, income/dividend stocks, increase your amount held in cash or government gilts, and generally avoid risk).

If your response is “No worries, man – I knew the risks” or “I’ve got another 20 years to get that back”, then you will want to invest in higher risk (and hence higher return) assets and markets (looking towards more risky emerging markets in Asia, Africa and South America, growth stocks, smaller company indices, etc).


I hate to think that this is true, but unfortunately if a study was done, I think that it would show that many people invest in their pension in the first names alphabetically on the list or names which look interesting. Beyond that level of laziness, people may invest in a name they had previously heard of. The problem with this is that you have probably heard of them because they spend millions of advertising, which eventually gets charged back to you in fees.

This is such an important decision that it is worth spending several hours on today, and every 6 months to check your allocation. Imagine the average Britain contributes 15% of their salary and this is matched with a 10% contribution from their employer, and they contribute this for 30 years.

  • At an annual investment return of 3%, their retirement pot would be £298,334
  • At an annual investment return of 6%, their retirement pot would be £503,224

I hope that this difference shows you the importance of this task!


How should I select my pension allocations?

I would, and I have, used the technique of working backwards, and following these steps:

1)      Ask yourself the “how would you feel” question and answer yourself honestly.

2)      Determine which markets, in which countries, you want to invest in based on your risk appetite. Do extensive research on their market performance and the wider economies. Do your own research. If you make a decision which was bad in hindsight, but you have researched it as well as you could, then this wasn’t a mistake. However, if you don’t research, then it serves you right!

3)      Determine which tracker funds and ETFs follow these markets or assets.

4)      Look at the differences, if any, between the different available funds in each market and determine which are available in your specific pension scheme.

5)      Determine the TER and fees for each option.

6)      Select your funds and weighting between each, again based on your risk appetite, but always remember to diversify (don’t invest everything in Zambia because you think it will grow!).


I hope that helps. Let me know how you chose your pension allocations?  What are your thoughts on active vs passive funds?



Coming up to retirement age and need more help regarding pensions? Then check out Keys Retirement Solutions where you can use their free annuity calculator, free equity release calculator or speak directly with their specialists regarding your specific situation.



3 thoughts on “Am I saving enough for my pension? Part II – How to invest

  1. This article is really worth reading. There are many senior citizens are retiring every month and they’ll find such article each suggestions quite handy to put their retirement saving to a fine place. Although these suggestions will be effective till my retirement period to save enough money for my pension. Thanks for understanding people necessity and sharing an article considering such an important topic.

  2. Interesting…! I do not like any type of risk when it comes to my finances. So I would be more comfortable with passive funds. Tracker funds and ETFs sound like less risky options to me so I would go with these.

    That said, the reason I’d play it safe is the lack of knowledge on how markets/investments work. Once I start reading about investments, etc, I will acquire more knowledge and get more comfortable in perhaps taking some risks too… not yet though 😉

  3. Pingback: Am I saving enough for my pension? Part I - Pension calculator

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