Following the Governments introduction of the Auto enrolment scheme in 2012, almost all of us now have a pension plan in place, paying in the equivalent of 8% of salary (5% employee and 3% employer) since April 2019.

With this in mind, it makes sense that we seek to maximise value of this scheme, paying close attention to how the contributions are invested. In other words, what fund/funds are used to generate the growth we require for our retirement. Ultimately this means that we must plan carefully over the long term to build a pension pot that can generate sufficient growth to meet our retirement needs and goals.

The importance of diversification in pension planning

Whilst we would like to think that every fund – whether investing in equities, property, cash, or fixed interest securities – will continuously soar, this is simply not the case as asset classes generally experience different peaks and dips at altering times. The importance of an effective investment portfolio strategy is therefore to have sufficient funds over a number of asset classes in order to ensure that the right level of diversification exists and the pension fund is protected from the downturn of a specific asset class. For example, whilst the recent market downturn witnessed all asset classes initially dip, assets such as gilts and bonds recovered at an earlier stage, helping to provide positive/neutral returns and reduce the negative impact of the equity downturn on investors’ overall portfolios.

Determining asset allocation of an investor’s portfolio

The specific allocation of an investors pension fund to the different asset classes available will be influenced by a range of factors including:

• Investors attitude to risk and capacity for loss. Individuals with a higher risk capacity will generally have a higher allocation towards riskier assets such as equities and property. For individuals with a lower risk capacity, the portfolio will typically be more heavily weighted towards assets such as gilts, bonds and cash.
• Timeframe to retirement. Portfolios can be designed to cover short term (5-7 years), medium term (8-15 years) and Long term (+15 years) timeframes. In general, short-term portfolios will include Cash, bonds and UK equities, whilst long-term portfolios will be more focused on higher risk asset classes such as Global equities and property (they will still be balanced by Bonds and Gilts in order to achieve the right level of diversification and risk spread).

Exploring the wider picture

It is important to note however, that whilst portfolio construction (asset allocation and diversification) is a vital component in seeking to generate sufficient growth and maximise returns on an individual’s pension portfolio, it is not the only factor to consider. Here at DAM we believe that this is only one part of the wider jigsaw in the financial planning process, and seek to spend time working alongside our clients to carry out wider financial planning, focusing on an individual’s ambitions, plans and goals for the future.

Through sophisticated lifestyle financial planning, we can effectively differentiate between a client’s current assets/net worth and that of what is required to meet their retirement goals. This then allows for the design of sophisticated investment portfolios that not only offer sufficient diversification (meeting an investors risk profile and time frame), but also one that aligns with their wider retirement goals and income requirements.

Therefore, whilst as an individual you do not need to be an expert on portfolio construction or lifestyle planning yourself, you do need to know that your pension is being managed correctly and that financial planning is in place for your retirement. And this sense of comfort and ease is precisely what we seek to provide for you at Davidson Asset Management.

We all need that little bit of help, particularly during these difficult and turbulent times, and Davidson Asset management is here to provide it.