5 Steps to Choosing a Pension Fund
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So, where to start? You're best bet is to get the lowdown on the range of funds offered by your pension provider or online stock broker. Each fund comes with a Factsheet and a Key Investor Information Document (KIID). These are packed with essential information which we’ve spelled out for you below to help make-up your mind up.
Not confident in your financial prowess? No biggie. You can get advice from a Financial Advisor but continue reading to pick up some useful tips.
#1 Risk level
You’ll need to decide if you want a low, medium or high risk fund. If you start on high or medium risk you can switch funds to reduce risk as you approach retirement. There are a number of ways to gauge risk:
Risk Profile… a score from 1 to 7, 1 being the lowest risk and 7 being the highest.
Asset Allocation… all the assets in the fund, think: commodities, stocks, property, bonds, cash.
Regional Allocation… all the countries the fund has invested in.
Risk Factors… a highlighted list of the specific risks.
A word to the wise: funds packed with commodities and equities - aka shares of companies - carry a higher risk than those with more bonds and cash. Also, funds focusing on emerging countries – Brazil, India, China, and Russia for example – are riskier. More risk means a larger change in your money’s value (both up and down) is more likely!
#2 Industries, companies and countries. What this means for you.
It’s great for sun-drenched holidays but we’ll pass on investing in Greece, thanks. A solar-energy company? Now that’s the ticket! Make a list of any business or region you definitely do or definitely don’t want to invest in and support. This could be on moral grounds or you may have a long-term view on an industry or company, such as healthcare, technology or consumer goods, that you expect to do well. Every fund factsheet gives you the following:
Sector Breakdown... all the industries the fund has invested in.
Regional Allocation… all the countries the fund has invested in.
Top 10 Holdings… the companies making up the largest portion of the fund.
#3 Past performance
It’s not a guarantee of the future but you still want a fund that has a proven track record. It’s best to look at the fund’s Past Performance over the longer terms, say over 3, 5 and 10 years. In the Fund Factsheet you'll find a table of the past five year’s performance showing the percentage increase (or decrease), plus a chart showing the performance against a benchmark to compare how well the fund has done against similar investments. You want to make sure the Fund Manager is earning their fees!
#4 Who’s behind the fund?
You’ll also find the name of the Fund Manager and how long he or she has worked there. Look up how the fund has performed over this period. Is it consistently good? Bad? Meh? The KIID also provides the fund’s Objective and Investment Policy which gives you an idea of the manager’s strategy and goals.
If you choose a tracker fund, which requires no manager as it follows a set list of investments such as the largest technology companies in the UK, you can move-on to step 5.
#5 The charges
Funds have an Ongoing Charges Figure (OCF) - aka Total Expenses Ratio (TER) - where you pay a percentage of your pot’s value to the fund’s management every year. This can range from 0.10% to 2.00% a year, which is £10 to £200 for every £10,000 invested. The riskier funds, aiming for higher returns, charge the most while the tracker (aka passive) funds charge the least because they don’t require ongoing management. Whatever the charge, you want to be happy with the return after the fee has been deducted.
There may also be other fees including:
Entry Charge or Initial Charge… a fee to enter the fund usually charged as a percentage of your total investment.
Exit Charge… a fee to leave the fund.
Performance Fee… if the fund makes you profit you pay a percentage of this to the fund managers (cheeky yes, but if they are that good they can get away with it!).
Fees should always be clearly displayed on the fund information page but, if in doubt, look at the KIID as it’s a legal obligation to include them in there.
MOXI Round-up
Because you'll hold your pension investment for decades, utlimately the yearly fees will add-up to a huge amount. The major fees are paid to your pension provider and fund manager. You need to balance the fund's performance with these fees and ensure your wealth is growing at an acceptable rate after these have been deducted. Read-up more on the fees in our guide.
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Asset Allocation, Fund Factsheet, Fund Risk Profiles, Fund Sector Breakdown, Key Investor Information Document (kiid), Ongoing Charges Figure (ocf), Passive Fund, Total Expenses Ratio (ter) ,