SELF INVESTOR
Ren is a technical expert at the organisation, she’s always enjoyed learning the nuts and bolts of how things work.
SELF INVESTOR
Ren is a technical expert at the organisation, she’s always enjoyed learning the nuts and bolts of how things work.
When Ren first joined the pension scheme, she wasn’t aware that her pension was invested in the stock market. Since taking the opportunity to learn more about what’s on offer, she has taken the first steps to understanding how the money in her pension can grow over time. Now she makes her own investment decisions and chooses where her pension is invested. Investment performance will make a big difference to the money your employees get when they retire. But everyone’s level of investment knowledge is different, and people will have varying goals. Where individuals choose to invest depends on things like how much risk they’re happy with, how far off they are from retirement and even their personal views and beliefs. Please remember: all investments and their income can fall as well as rise in value so your employees could get back less than they invest. Past performance is not a guide to the future. So what do you have to consider as an employer who provides a workplace pension scheme for your employees?
Basic investing terminology As an employer, it’s helpful to have a basic understanding of investment terminology. Below is a quick guide to some of the most common terms:
- Funds – A fund is an investment that pools together the money from many individuals. Fund managers then use it to invest in a wide range of shares and/or bonds. Each investor is issued units, which represent a portion of the holdings of the fund.
- Investment trusts – An investment trust is a type of fund set up as a company, so its shares can be bought and sold on the stock exchange. They aim to make money for their shareholders by investing in a portfolio of shares, property or other assets, chosen and run by the investment manager.
- Bonds – Bonds are investments representing the debt of a government, company or other organisation. When an individual buys a bond, they are, in effect, lending a company or government money. In return they receive interest, and the issuer promises to pay back the loan on a specified date. Effectively they are loans, or "IOUs" issued by these organisations.
- Shares – A share is a part-ownership of a company. In simple terms, a share is a percentage of ownership in a company. When a company is listed on a stock exchange the shares have a value and can be bought and sold. Investors who hold shares of any company are known as shareholders.
- Compound interest – As well as growing the money an individual invests, with compound growth they also earn growth on any profit. For example, imagine someone invests £10,000 and it grows by 5% to £10,500 – an increase of £500. If they keep their money invested, they’ll now start to make returns on the £10,500. The same 5% rate of growth would now earn them £525. That’s the secret of compound growth. If your employees get started and stay invested over the long-term, it takes care of itself. Of course, it’s important for your employees to regularly review their investments to check that they are still right for their objectives.
Default investment fund
Lots of workplace pensions are invested in a default fund – a “one size fits all” fund which tries to meet the needs of all members as far as is practical. Qualifying auto-enrolment schemes are required to offer a default fund option. A default fund is a great place to start for those that don’t feel comfortable choosing their own investments. When choosing a pension provider for your workplace, how the default fund is structured, how it operates and what it’s invested in should be a key consideration. Your employees may ask you about the default fund. In these cases, give your workers details and descriptions of the specific fund choices available to them, including applicable charges, or refer them to your pension provider who should be able to answer any more detailed questions from your employees. The Pensions Regulator has more information about how you can communicate with your scheme members about their default fund here.
Alternatives to the default fund
In addition to the default fund, many providers, such as those that operate a Group Self-Invested Personal Pension (GSIPP), will offer a wider range of investment options for those employees, like Ren, who are happy making their own decisions. Employees may be able to pick from a range of investments, including individual funds, investment trusts, bonds and shares, that carry with them varying degrees of risk. If they would like personal advice about how to invest their pension, it’s best to direct them to a regulated financial adviser.
What do you need to know?
It’s good to check the range of investment options your current pension provider can provide. You can evaluate whether they offer the choice someone like Ren might want. To help Ren on her investing journey, you can signpost her toward her available options, and ensure she understands the risks of investing.
Environmental, social and governance (ESG) investing
Currently a hot topic in the investment world, environmental, social and governance (ESG) investing, may be something to consider when selecting your workplace pension provider. Essentially, this is an umbrella term for investments that seek positive returns and have a positive impact on society, the environment and the business. Many employees are now keen to invest responsibly – choosing a workplace pension provider that offers a range of ESG funds can go a long way to increasing employee engagement with your pension scheme. Read more about ESG here. Taking a more hands-on approach
Investing outside of the default fund can feel empowering. Many providers now offer a mobile app, which means employees like Ren can check how their investments are getting on when it suits them. Lots of choice is a great start but it’s important for your employees to be able to access investing expertise when they need it too. Many providers have in-house investment analysts dedicated to provide up-to-date market research, comment and news to support investors in their journeys. And if they need a more personalised helping hand, hiring a financial adviser can help make the transition from the default fund to selecting their own investments that much easier.
Costs and charges
For your employees The platform charge, sometimes referred to as an admin charge, this is usually paid annually to cover the cost of administering your employee’s account. The fee will apply to most platforms you come across and will normally be in the form of a flat fee or a percentage of the investments held. If the platform charge doesn't include investment charges, there's usually a fund manager’s charge too. The fund manager's ongoing charge is the management charge the fund manager levies each year, usually expressed as a percentage of the value of the investment. This charge can usually be found on the fund factsheet and in Key Investor Information. For employers As part of auto-enrolling your staff into a workplace pension scheme, you are legally obliged to pay contributions into the pension of each member of staff that meets the qualifying criteria. Please see our ‘New Joiner’ section for more information on contributions.
What does Ren need to consider?
The main consideration for Ren is risk. Unlike the security of cash, the value of all investments, including the default fund, can go down as well as up, it is possible to get back less than invested. That’s why it’s important to be clear about the risk levels of any given investment and compare them against her own risk appetite. Investing regularly as opposed to ad hoc lump sum investments has its benefits. Ren can make an initial choice of where she would like to invest her pension. Thereafter, most providers offer automatic monthly investing into the same funds. As long as employees like Ren are regularly checking that their pension is still in line with their investing goals, automatic investing does the hard work for them.
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