Pension Freedom  

How to make the right choices in accumulation

This article is part of
Guide to retirement income pathways

How to make the right choices in accumulation

Starting to save for later life can involve several stages.

The process by which individuals build their pension pots is called accumulation.

While several choices exist depending on people’s different desired lifestyles, how do individuals make sure they make the right accumulation choices for the long-term?

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This matters as, according to Sir Steve Webb, director of policy at Royal London, individuals who were members of a defined benefit pension scheme did not have to give much thought to the rate at which they built up their pension wealth.

He says: “Their own mandatory contributions, plus a substantial contribution from their employer, meant that as long as they had reasonably long service they would be comfortably off in retirement.”

He adds: “But in a world where millions of workers never had access to a DB pension, growing attention will need to be focused on helping people build up the right sort of defined contribution pot.” 

Risk and return

Royal London research suggests that, in addition to a full state pension, someone on average earnings needs to target a pension pot of around £290,000 for a comfortable retirement. 

Several experts highlight that retirement savings are mainly influenced by risk and return levels.

Nathan Harris, a chartered financial planner at Lothbury Group, says: “The higher the risk, the higher potential return, but equally it requires an individual to be prepared to accept volatility in their funds' value.”

Mr Harris suggests that cost will also impact how quickly the funds grow, which means passive investing may be the best approach.

But he adds: “While passive has performed well in the past few years, there are times when it is worthwhile paying for an active manager.”

Mihir Kapadia, chief executive of Sun Global Investments, also links pensions accumulation to risk and return.

“Risk and return are at the forefront of any individual’s mind when it comes to making the right choices in accumulation. To do this, it is important that consumers try to maximise return for a given level of risk, which is consistent with their risk tolerance,” he says.

Accumulation options

Mr Kapadia believes individuals should consider if they need income immediately or whether they have the flexibility to grow it over the long-term.

“If you require a regular income from your investments then an income fund could be beneficial as they combine the short-term benefits of a regular income with those of a much longer term investment,” he explains.

Mr Kapadia adds: “Alternatively, the individual can choose to reinvest funds instead, which will allow them to grow faster alongside the potential for profit. If not, then more money can be invested and will be subject to the risks in the stock market.”