Obtaining financial freedom through better investment
Using your pension as the vehicle for your investments makes real sense as the contributions made to them are so tax efficient. An example of this is how the government provides tax relief of up to 50% on your contributions (depending on your marginal tax rate) giving you an immediate return on your investment of up to 100%. The flexibility provided by modern schemes such as a SIPP means that the majority of investment types can now be made via a pension.
Where to invest your money
When it comes to your pension, the general rule of thumb is to spread your investment risk as widely as possible. By concentrating your investments in just a few companies or business sectors, you are putting too many of your eggs in one basket.
We all have different attitudes when it comes to how much investment risk we are prepared to take. And a good financial adviser will tailor your portfolio to reflect the level of investment risk that is right for you. The bottom line is, the more you concentrate your pension investments, the more you are taking a gamble with your retirement savings.
Active vs passive investment strategies
The more traditional approach to investing pension savings is called active management. Your fund manager or financial adviser will use their years of experience to choose which companies your money should be invested in. They are effectively trying to predict the future, looking to sell shares before their value starts to drop and reinvest your money in shares they predict will rise in the near future. This can be a risky strategy because, as things stand, no one can predict the future.
A passive strategy generally involves investing your pension savings in what is known as a tracker fund. Tracker funds aim to replicate the performance of a specific slice of one stock market (called an index) because history shows us that stock markets have always risen over time. Although, it’s important to remember that past performance is not a reliable indicator of future results.