Four ways to build a pension and keep your retirement savings strategy on track

It’s never too early to plan for the cost of retirement and the amount of money you need to save. Even if you’re 20 or 30 years away from giving up work, the sooner you get your strategy in place, the easier it might be to squirrel away money so you can enjoy your golden years without financial stress.

In the future you’ll look back and be thankful for getting your retirement plan ship-shape at a younger age. Leaving it to the last-minute risks having a shortfall after you stop working, and that can create all kinds of problems.

Feed your pension as soon as you can

Those aged 22 or older in full or part-time employment earning at least £10,000 a year will have a workplace pension, unless opted out. Your employer will pay into your pension every month alongside your own contributions and tax relief from the government. This trickle of money could add up to something meaningful over time.

Individuals confident enough to run their own pension might even transfer one or more workplace schemes into a SIPP (self-invested personal pension), so they can have greater control over the investment choices.

Certain employers are happy to make monthly pension contributions into a SIPP, but others might restrict their payments to a workplace scheme so check first before making the switch.
Self-employed workers do not have the luxury of auto-enrolment so they must make their own pension arrangements.

The foundations of building a pension

Whether you’re picking your investments in a SIPP or choosing from a brief list of investments in a workplace pension, it’s important to have a solid foundation in place. From an investment perspective that means deciding how much of your pension goes into shares, bonds or other assets.

Individuals with a workplace pension might find they invest in something called a ‘balanced managed fund’. Each £100 invested in this fund is allocated to a range of investments such as 20% in UK shares, 50% in overseas shares, 20% to 25% in bonds and up to 5% in cash. The weightings can vary from fund to fund.

This type of asset split is a good starting point when building a plan, but asset allocation comes down to your personal preference and the level of risk you are willing to accept, as well as your personal financial circumstances.

One way is to divide assets into either growth or stability. Younger people might prioritise shares over bonds because historically they have delivered superior returns over the long term. Those still in employment might want to consider reinvesting any dividends or interest payments from bonds or choosing a fund that does this automatically for you.

Those nearing or in retirement might have a higher weighting to bonds because they might bring more stability to a portfolio with the main emphasis on generating income rather than capital gains.

The materials used to build your pension

Just as there are different shapes to a home – such as a semi-detached, terraced, detached or maisonette house – there are also varied materials used to build them, ranging from bricks, concrete and wood or a mixture. It’s the same with pensions.

Once you’ve decided upon your asset allocation, you need to decide which investments will fill your pension and help to keep a roof over your head during old age. You can choose from a wide range of funds, investment trusts, ETFs, shares and bonds.

Investors often use a workplace pension to get broad exposure to stocks and shares around the world and a range of bonds – these might form the ‘core’ part of their retirement savings. They might also have a SIPP to invest in specialist areas of the market which might not be available via workplace schemes – these represent the ‘satellite’ part of their strategy.

Other investors might decide to consolidate all the pensions they have built up during their working lives into a single SIPP and take full control of their retirement savings strategy.

Whatever you pick for your pension, a good strategy is to diversify your exposure across different geographies and sectors. That means you’re not overly reliant on one area to do well. Each component should play a significant role – the parts might move at different paces and travel in different directions at times, yet together the goal is for them to provide a smooth ride.

How should you maintain a pension?

There are a few simple rules to follow if you want to keep your retirement saving strategy on track. First, pay in as much as you can along the way.

Employers must pay a minimum of 3% of an employee’s qualifying earnings towards their workplace pension. Certain employers will pay more than that amount if you also increase your contribution beyond the 5% minimum employee amount.

Consider making additional contributions as and when you receive lump sums, such as a bonus at work or if someone gifts money to you.

Just like you would get your car checked out once a year for an MOT, check you’re happy with the weightings of your portfolio from time to time. If one part of your portfolio does well, such as helped by a rally in the stock market, you might find you have more of your money held in shares than bonds compared to your original plan. There is something called ‘rebalancing’ which means selling certain bits and buying others to put your asset allocation plan back on track.

For example, you might have originally wanted 70% in shares, 20% in bonds and 10% in property. If the shares component did well, your plan might become 85% in shares, 10% in bonds and 5% in property. In this example, to get back to the original asset allocation plan, you would sell part of your shares and use the proceeds to buy more bonds and property-related investments to return to the 70/20/10 structure.

It’s also worth checking you’re happy your investments are doing what you expected. If not, you might want to switch to something else. Just don’t flick between investment products on a regular basis simply because something hasn’t gone up in weeks or months. Patience is paramount when it comes to investing. Constant portfolio changes also incur trading costs each time you buy and sell, which ideally you want to avoid.

As you get older, you might find your risk appetite changes and so you might want to reshape your portfolio. Potential times to think about remodelling the shape and style of your pension might be in the lead-up to retiring or once you’re retired and you find your pace of life slowing down.