Why take risks with your pension savings? Well, for good reason as the rewards you receive from the growth of your money simply means a better standard of living in retirement. The alternative, whether you’re saving for retirement, or are already there is to leave your money in a low-risk cash deposit. And, with only low interest rates on offer the brakes will soon bring the growth on your money shuddering to a halt. What’s more, with inflation typically running at an average of 2% each year the value of your savings will fall over time. The pound in your pocket then buys you a lot less.
The key to happy pension investing, and to side-stepping the perils of poor cash returns and inflation, is to balance the risk you want to take with your money with the reward you might get from taking that risk. There’s a close link between the two.
The money in your pension is exposed to risk from the investments it’s placed into. You have to embrace this risk and give it a hug. Only then can you enjoy the warm glow from your reward, the long-term growth in the value of your money.
Simply, the higher the risk you take then generally the higher the reward you can expect. Beware though. Those higher risks can have big downsides too and your investments can fall in value. So, good financial advice is always important.
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What does balancing risk and reward mean?
To achieve that lovely, super-sized pension pot we all dream of, we must strike a balance between the level of risk we are willing to take and the rewards we could get in return. It’s a long-term commitment. Investing your savings and receiving your reward won’t happen overnight.
Here’s a simple example. If you decide to take higher risks, the majority of your money will be placed in stocks and shares. The growth could then shoot the lights out during the economic good times when stock markets and shares rise. Your pension pot will look very healthy. On the flip side, when a recession comes along and markets fall, your savings typically will too.
The good news is, history shows us that over the long-term stock markets rise, increasing the value of your savings. Portafina’s investment philosophy uses mountains of research and historical facts to spread your risks by investing in thousands of company shares.
For cautious investors taking lower risks with their savings, the rise and fall in the value of their pension money is generally smaller. It’s vital that you establish the level of risk you personally can accept for your savings. We explain how in a minute.
How do I decide my risk and reward balance?
As in life some people are prepared to take more risk than others. There’s lots of questionnaires available from advisers and pension schemes to help you pin down the level of risk you are prepared to take with your money. Once this is decided, your money can be placed in suitable investments from which your savings growth reward should follow.
Why is balancing risk and reward so important?
Balancing risk and reward is personal to you. Let’s imagine you’re 55 and decide to take out some tax-free cash for that big holiday. At the same time a recession rears its ugly head, stock markets take a tumble, and your savings follow suit. You’re left feeling as flat as 2-day old prosecco. Remember, if you withdraw too much too soon you could drain your pot and risk not having enough savings to live on later in life.
On the other hand, if you’re not retiring for decades and a recession happens then things could feel very different. Although your savings have gone down in value they’re likely to go back up again. Historically, when a recovery starts and stock markets are on the rise your pension savings normally follow suit.
Does the risk and reward balance affect all pensions?
If you have a personal or workplace pension scheme where money is paid in and invested into your own plan, then balancing risk and reward definitely affects you. The income and cash benefits you get at retirement depend, in part, on how much risk you have taken when investing your savings, and the rewards you have received in terms of the growth in their value.
Balancing risk and reward is still important at retirement, even if you are taking a regular income or cash sums. The reason is that it could affect how long your money lasts in retirement. And, how much you are able to take out along the way. Remember, people typically become more cautious as they get older. They don’t want to see their savings buffeted by stock market ups and downs.
If you are a member of a final salary pension scheme which pays you a guaranteed pension for life at retirement then the question of balancing risk and reward is taken care of for you by your pension scheme.