Your pension is ultimately your most important investment. It's all about building up the fund that you'll be living off once you stop working and determines the lifestyle you'll eventually lead.
But, unless you are lucky enough to be in a final salary or defined benefit pension, how much you come to retire on doesn't just depend on how much money you save it also depends on how much your investment grows. So where you choose to invest is crucial too.
All pensions will give you a choice of investment funds - ranging from a handful on a basic stakeholder scheme through to several hundred on a more comprehensive personal or workplace pension. If you are invested in a Self Invested Personal Pension you'll have access to the entire universe of funds (in addition to shares and other more esoteric investments).
So where do you start? Choosing your pension funds is just like choosing any other investment, in so far as you need to consider your attitude to risk and your investment time frame, that is the length of time you have before you'll need to get your hands on the money.
Ben Willis, head of research at Whitechurch Securities says: "Generally speaking, as younger investors have a longer time until retirement age, and so a longer investment horizon, they can take on more risk with their pension investment in the hope of generating better returns. It is not unusual for younger investors to be fully invested into equity funds, particularly high growth potential markets such as Asia Pacific, emerging markets and frontier markets."
For smaller investors that don't yet have the capacity to invest a wide range of funds, advisers often recommend Global Equity funds for a high level of diversification. Darius McDermott, managing director of Chelsea Financial Services says: "We like them to have a good smattering of small- to medium-sized companies too." Justin Modray, founder of IFA Candid Money adds: "A global equity fund with around 50% exposure to the UK stockmarket is a good starting point."
McDermott adds that younger pension savers shouldn't overlook equity income funds as over the long term the compounding of reinvested dividend payments can be a massive driver of growth. "This can be particularly good for lower risk investors, as these funds tend to invest in stable companies," he explains.
Your risk profile however should start to change as retirement draws closer with your focus shifting from growing your money to protecting it. A major stockmarket fall could have a massive impact on your retirement income if you do not have time to recoup your losses. Take 2008 as an example, when the credit crunch wiped almost 30% off the FTSE 100. This shouldn't have been a major concern for the long-term investor but it could have been a disaster for an investor approaching retirement who was too heavily invested in equities.
At this stage you will also need to have a very good idea as to what you will do with your pension fund. Will you buy an annuity to secure a fixed income, or will you leave your pension fund invested and draw an income?
What you choose will have a significant bearing on the asset allocation within your pension and determine how you invest in the years approaching retirement.
De-risking your portfolio
Following the introduction of pension reforms in April 2015, how you invest in the run up to retirement will depend on what you plan to do with your pot.
If you are going to need your pension fund to buy an annuity (or Lamborghini) protecting your capital is vital as you won't have any time to ride out any short term losses.
As a guideline Willis says: "Pensions investors with, say, 10 years or less until retirement age should look to diversify and hold more core positions within the developed markets of the UK, US and Europe, while also allocating to other asset classes such as corporate bonds funds, direct property funds or absolute return vehicles."
"Those with less than five years until retirement, unless they are very high risk, should be looking to safeguard their pension and the general rule of thumb is to hold nothing in equities but instead hold a mix of lower risk asset classes."
The move out of equities, however, can be a gradual one. Depending on your attitude to risk this might mean moving 10% out of equities every year for 10 years or 20% over five.
If, however, you are sure you are going to go down the drawdown route the need to de-risk isn't quite so important, you may want to review higher risk holdings but you won't want to move out of equities altogether. While you won't relish stockmarket falls at this stage, if your money remains invested you do at least have the time to recoup your losses. "If you are planning to retire at 60 and expect to live until 85 you wouldn't want to be taking all the risk off the table straightaway," warns Darius McDermott, managing director of Chelsea Financial Services.
Wherever you are on your retirement planning journey you can check out how your pension funds are performing or research new funds with the Moneywise pension fund comparison tool.
Can't decide which pension funds to choose? Check out the top performers in the Moneywise Pensions Awards 2016.
If you still can't decide where to invest it may make sense to get independent financial advice or if cost makes this prohibitive you can always plump for your pension provider's default fund. Here your money is invested on your behalf with a focus on capital growth in the accumulation years but is gradually moved into lower risk assets like gilts and cash as retirement draws closer.
Default pension funds
From a saver's point of view this is simple and convenient. It also avoids the risk of ploughing too much money into funds that could either be too high risk or so cautious that you won't generate a big enough return.
However some advisers warn that these funds may not be the best approach both in terms of performance, strategy and asset allocation – particularly in the current economic climate. "Default funds are a one size fits all solution," warns Laith Khalaf, head of corporate research. "They are simply the least worst option available. Younger investors should consider where they should be taking more risk and older investors need to consider whether they should be moving into safer investments as they approach retirement. However at current prices that doesn't necessarily mean bonds, which could be vulnerable to a sell off if interest rates rise."