How we invest your pension
If you've already read about why your pension is invested and where your money goes… congratulations, you are already well on your way to understanding your pension’s secret life.
Now for the science. The technical transformational process your money goes through to turn your pounds now, into hopefully more pounds in the future.
Firstly, remember, there are two big goals that your pension fund manager has for your money while you are busy working: to keep it safe and to help it grow.
Watch our video to find out more about how we look after your pension.
Video transcript
Would you like to know what Royal London does with your pension contributions?
Behind the scenes, there are teams of people working hard to grow your money into the retirement pot you want.
If you signed up to your pension through your employer,…
...chances are it’s invested in what’s called the ‘default’ option. The default is carefully designed to suit the needs of most people.
Your money is put to work and invested in a range of ‘assets’, things like company shares, cash, bonds and property.
Asset managers are in charge of how much money goes into each.
They look at how each asset class is performing in the short term,...
...as well as how they think they’ll perform in the future.
They make sure you’re invested in a wide range of assets – this is called ‘diversification’.
It helps to reduce risk, so if one particular investment is performing poorly you shouldn’t be so badly affected.
Another way to spread risk and aims to keep things growing is to invest in funds rather than directly in companies.
When our asset managers use your money to buy company shares, they put it in a fund, which often invests in several other funds.
These funds hold shares in a number of different companies.
The Royal London default option also gradually reduces risk in your final 15 years before retirement, to avoid unwanted drops in value and help you to plan.
This means shifting your money gradually out of riskier assets (like company shares)...
…and into more defensive assets as your chosen pension date approaches.
Nice to know your pension is as busy as you are, isn’t it?
What happens the moment your pension contribution leaves your pay packet?
It’s not quite as simple as you’d think… most people reckon their contribution gets combined with their employer's contribution, invested directly in the global stock market, and then paid back to you in 30 to 40 years’ time. But that’s not quite what happens…
Think of your pension contribution as going into something like an upside-down funnel. The money goes in the narrow bit at the top and then is spread out across a range of investments, going through several stages in between… we’ll take a look at these now.
Default investment strategy
If you have a Royal London pension (you can check this with your employer), the chances are you are invested in the ‘default’ investment. This is the where workplace pension scheme members are automatically enrolled when they join.
Once your contribution is received, it is automatically invested by the asset managers we use (the main one is Royal London Asset Management, our wholly-owned subsidiary).
The default investment strategy is called the Balanced Lifestyle Strategy.
How does a default investment strategy work?
Not all this money is invested in one place, some goes into ‘equities’, which is buying shares in companies all over the world. It also goes into ‘property’ by purchasing buildings and offices all over the UK. It can also be used as loans to companies, or even the government, by purchasing ‘bonds’.
Spreading out your money like this is good for two reasons. Firstly, it limits risk, as if one part of the market goes through a rough patch, at least there is some money in another area to balance this out. Secondly, it gives your retirement savings the biggest possible chance of rising in value over the years, so you end up with a decent-sized pot when you stop working.
This investment approach is reviewed frequently to make sure it is still achieving its goals on your behalf. It has to grow for decades, after all, and markets and strategies for long-term growth and risk management change over time, so your investment approach should too.
This is why tweaks are made by the pension fund managers if necessary, along the way.
Want to check in on your pension?
You get an annual update on the value and performance of your fund in the post, but you can also check how it’s doing in the Royal London app, or by logging in to our website.
When you are thinking about collecting some of your pension (remember you can take a lump sum from age 55), you can speak to your financial adviser or let us know directly.
The process of accessing your pension is a whole other story… you can find more information about this here.