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Join Which? Money5 investment questions to ask about your pension
Majority of workers do not understand what happens to their contributions
A third of people did not know their pension was invested, and 30% were unsure, according to a survey by Hargreaves Lansdown.
This misconception could lead to people not engaging with their pension, experts have warned.
Here, Which? sets out five questions you should ask yourself about your pension investments, and how much money you should aim for in retirement.
1. Why are my contributions invested?
With phrases such as 'saving into a pension' bandied around, it’s no surprise some workers believe their contributions are going into some kind of savings account, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown commented.
In fact, your contributions are normally invested in companies in the stock market. Over time the growing value of the companies you hold shares in, added to any dividends they pay, will grow your pension, which you can unclok when you hit retirement.
You also benefit from tax relief on your pension, which means some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.
Morrissey added that helping workers understand they are investors could help boost engagement. She said: ‘If people can see their money growing over time, it can make them more likely to boost their contributions and check in on their pension’s progress.'
But it’s important to remember the value of your investments can fall too, so in challenging times you may see your pension pot shrink, rather than grow. However, it's likely the losses will recover and rebound if you're still a way off from retiring.
As you approach retirement, you’ll be able to decide how you want to cash in your pension, which could include buying an annuity, pension drawdown, taking the whole pot or a lump sum.
- Find out more: pensions tax relief explained
2. How are my investments managed?
This will depend on what type of pension you’re saving into and whether it’s been set up by you or your employer.
You should be able to check your annual statement.
Defined contribution schemes
Money put into your workplace pension will be invested in so-called default funds designated by the scheme provider, so you don’t need to proactively choose and monitor your investments. A fund is a collection of investments, managed by a fund manager.
There are two main types of defined contribution pensions:
- Trust-based schemes are run by a board of trustees that oversee the management and investments. The trustees choose the professionals who look after your money and have a duty to you as the member of the scheme to get the best deal on your behalf.
- Contract-based schemes means your employer has appointed a pension provider, such as an insurance company, to run your pension scheme. These are sometimes referred to as 'group personal pensions', and offer much greater choice in the investments. Around 95% of employees stick with the default investment fund.
Find out more: defined contributions pensions explained
Final salary pension
With a final salary (also referred to as a defined benefit or DB) pension, the pension scheme board of trustees and employers take responsibility for choosing investments with the help of third-party advisers and actuaries.
Your benefits are guaranteed, so investment performance isn’t something you need to worry about.
- Find out more: final salary pensions explained
Self-invested personal pension
Unlike other types of private pensions, where you usually rely on the scheme provider to decide where your retirement savings should be invested, a self-invested personal pension (Sipp) puts you in the driver's seat.
A Sipp gives you access to a wider range of investment options than other types of pension. These include shares (also known as stocks or equities), investment trusts and corporate bonds – as well as commercial property.
You'll be taking on responsibility for choosing and managing your own investments, so you'll need to have the time and confidence to do this.
However, some providers offer ready-made collection of funds, you don't always need to pick out individual investments.
- Find out more: best Sipp providers 2024
3. Where is my money invested?
Your money will usually be invested in one fund or a number of funds.
A fund is a way to invest money. Depending on what type of fund it is, your money could be invested in company shares, bonds, or a mixture of different types of investments.
However, it could be invested in anything from wind farms to weapons and tax-dodging corporations. And it’s not always clear exactly where your retirement savings are going.
If you want to find out where your pension is invested, this information should be on your annual statement. Alternatively, you should be able to contact your provider and find out.
According to a May analysis by pension provider PensionBee, on average around 10% of defined contribution pension savers’ money is invested in US tech giants including Amazon, Apple and Microsoft.
The following table shows the average savers' investments.
| Holding | Average invested | Equivalent amount for £20,000 pension |
|---|---|---|
| Microsoft | 2.6% | £437 |
| Apple | 2.5% | £420 |
| Nvidia (hardware and software company) | 2.1% | £353 |
| Alphabet (parent company of Google) | 1.7% | £286 |
| Amazon | 1.3% | £218 |
| Tesla | 1% | £168 |
| Meta (owner of Facebook and Instagram) | 0.9% | £151 |
Sums calculated on an average of investments of 84% in equity and 16% in fixed income and other types of assets. Averages made across funds provided by PensionBee (LifePath 2049-2051 Fund), The People’s Pension (Global Investments Fund, up to 85% shares) and Nest (Higher Risk Fund)
- Find out more: FTSE 100 hitting record highs – should you invest?
4. How green is my pension?
If you care about fighting climate change, your retirement savings can help.
A report by the independent research organisation Profundo on behalf of Make My Money Matter – a green pensions campaigning body – estimates that UK pension schemes invest an estimated £88bn in fossil fuel companies, £3,000 per member.
It claims that 85% of leading UK pension providers have ‘inadequate’ or ‘poor’ climate plans in place.
Make My Money Matter has also ranked the climate strategies of the UK’s largest defined contribution workplace pension providers. To find out how your provider ranked, and ways to switch your funds, check out our news story into how green is your pension.
- Find out more: how your pension can save the planet
5. How does inflation impact my pension?
Over the past couple of years inflation has soared, hitting a 41-year high of 11.1% in October 2022.
Traditionally, the stock market is regarded as the best way to beat inflation. The main danger retirees face is when they move to safer investments such as bonds, which struggle to keep up with inflation.
If you’re about to access your retirement savings, rising living costs should be factored into your decision about how to take this money. There are some ways you can inflation-proof your pension, such as buying an escalating annuity, but these can be expensive.
- Find out more: options for cashing in your pensions
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Listen nowHow much you need to retire
To help figure out how much you need in retirement, we've spoken to thousands of retired Which? members, both those living alone and couples, to see where their money is being spent.
We found that in 2023, households with two people needed an income of at least £19,000 for essentials, including food, drink, housing, transport, and utilities. A single person would need £13,000.
For a comfortable retirement, which includes all of the above, plus regular short-haul holidays, recreation, leisure, alcohol, tobacco, charitable donations and gifts to family and friends, a two-person household would need £28,000. A single person would need £20,000.
- Find out more: how much do I need to retire?
