September 11, 2024 • 18 mins
In previous episodes, we’ve taken you through why pension savings matter so much and helped you get to grips with your investment. And now we’re taking you one step further, for a masterclass.
Taking us on this deeper dive into pension savings and what to consider if you want to take a more active role is Legal & General’s Michael Porter.
Michael talks with our host Kia Commodore about how workplace pension savings are invested, the difference between actively and passively managed funds, investment diversification and much more.
They cover what investment risk really means and what to bear in mind if you’re thinking of changing the funds your pension savings are invested in.
You can play the podcast and find other useful content on Legal & General’s website:
www.legalandgeneral.com/podcasts/a-little-bit-richer
You can find out a little bit more about saving into a pension on Legal & General’s website:
www.legalandgeneral.com/retirement/pensions
Kia and her guests share their own personal thoughts and opinions in this podcast. These might be different from Legal & General’s take on things. They give financial guidance for a UK audience that’s relevant at the time of recording. It’s general best practice, not the kind of personalised advice you’d get from a financial adviser.
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kia (00:01):
Hey, it's Kia. We've talked a lot on this podcast
about the importance of workplace pensions. Kim Brown did two
great episodes with me on getting to grips with your
workplace pension and why they matter so much. But today,
we're diving deeper into how your pension is invested. If
you've been saving into your workplace pension and wondering about
its performance, this is the episode for you. So what
(00:22):
does your dream retirement look like? Holidays twice a year,
being completely mortgage free, or having the money to pay
for your grandkids' education? Well, however your ideal retirement looks,
knowing where your money is invested and how it's growing
for you is going to be crucial. Welcome to another
episode of A Little Bit Richer, brought to you by
my friends at Legal & General. Today, we have another expert
from Legal & General, Michael Porter. Michael heads up the Workplace
(00:45):
Pension Product Team at Legal & General, so he's the right
man to explain more on how pension savings are invested,
changes you can make, and how investment risk is defined.
Welcome, Michael.
Michael Porter (00:57):
Thank you, Kia. Nice to be here.
Kia (00:59):
I'm really excited to have you here and talk about
one of my favorite topics ever, pensions. So first things
first, can you explain more about how your pension savings
are actually invested?
Michael Porter (01:08):
Absolutely. So the first thing to understand is that your
pension savings are invested, as you say in your question.
Your pension savings aren't held in a bank account or
a cash savings account, so where it gathers interest and
the value tends to go up and not down. Pension
savings are pooled together with other pension saver money, and
(01:29):
they then are invested into something called an investment fund,
which buy and sell different types of investments, which I'll
come on to explain later. But the value of those
can go up and down.
Kia (01:40):
I think when it comes to pensions, they're such a
great tool when it comes to planning for your retirement
and having that money stored there, but it can be
quite confusing. So I'm glad that you broke it down
for us. But let's get a bit deeper then. So
can you talk a bit more about investment risk and
what that actually means? Because I think when we talk
about investments and pensions, retirement, you want to make sure
(02:01):
that you've got that secure cushion there. So when you
hear the word risk, you get a bit scared, but
what does that actually mean?
Michael Porter (02:07):
So the first thing to note is that there are
different types of investments that your pension savings might buy.
There are equities, bonds, property, cash, or a combination of
those. Now equities are where your money gets put to
good work by investing into companies, and those are typically
listed on a stock exchange, and the value of those
(02:28):
companies goes up and down depending on how they perform.
Then you've got bonds. Bonds are basically companies or governments
that are taking out a loan, and with that loan,
they pay interest on the amount of money that is
being borrowed, and then at the end of that loan,
once it matures, they pay back the original amount of
that loan. You then have property. Property is investing into
(02:52):
commercial real estate or commercial properties. So that might be
a factory, a commercial unit, it could be an office
block. And when an investment fund purchases one of these
types of properties, the value of that property goes up
and down. But also, those properties tend to be let
out and then they receive rental income, which all goes
(03:13):
towards helping your savings grow. Then you have cash, and
cash isn't physically held cash, so it's not like cash under a
mattress. It's held on something called overnight deposit. Now that
might be with a financial institution or it might be
with the government, and they tend to be a bit
more secure. They're not guaranteed to not go down, but
(03:33):
they are a bit more secure. And then you have
a combination. So some investment funds might not be specific
to one of those types of investments. They might hold
multiple investment types, and those tend to be called multi-
asset funds or diversified funds, diversified growth funds. Then risk.
Different investments have different levels of risk. So basically what
(03:55):
risk means is it's the likelihood that the value of
your pension savings might go down. Now they go up
and down all the time, but in the shorter term,
it's all about how likely is your money going to
go down the following day or that particular day, and
that's what we call volatility. So one of the benefits
of having a pension is that your monthly savings go
(04:16):
into buying these investments. Now, you might have heard of
something called pound cost averaging. What this basically means is drip-
feeding your money into pension savings, and some months you'll
be buying investments when they're lower, sometimes you'll be buying
investments when it's higher. This smooths out your investment experience
and reduces the level of risk attributed to your funds,
(04:37):
but ultimately, it averages out and it reduces the amount
of risk that your pension savings have. You can think
about it a little bit like British weather, particularly in
summertime, when there might be dry days, there might be
wet, rainy, cold days. But if you look back across
history, typically, summer tends to be warmer, hotter, and drier
(04:58):
more often than not. So that's the benefit of pound
cost averaging. So sometimes your money might go in and
you're buying investments at higher cost, sometimes you'll be buying
them at a lower cost, but ultimately it averages out
and it reduces the amount of risk that your pension
savings have.
Kia (05:13):
So that is a good thing to note there. So thank you
for telling us about that. You've done a really good
job at breaking down the different assets that can come
with an investment fund. So can you explain to us
a bit more when it comes to workplace pension, where
are our savings usually invested?
Michael Porter (05:31):
So your savings are automatically invested somewhere. So that tends
to be called a default fund, or you might also
see it referred to as a default investment option. Now,
there are different types of default investment options. It might
be a single fund or it might be a combination
of different types of funds that leads to an investment
strategy. So you have somebody that's there managing your funds
(05:55):
and your investments on your behalf. So you've got the
safety and comfort in knowing that your pension is invested
by an expert. It's managed and it's looked after. It's
not guaranteed in terms of it may still go down
because in investments markets, you do get turbulence and you
do get volatility in the shorter term. But over the
longer term, equities, for example, they've proven typically to outperform
(06:19):
cash savings accounts.
Kia (06:21):
So when it comes to your pension, especially the workplace
pension, is it best to leave the investing decisions to
the experts and use the default fund that your pension
company offers?
Michael Porter (06:31):
So, generally, default funds are most appropriate for the majority
of investors. However, if you do want to take that
little bit of extra risk, there are different investment options
available for you, and the best way to find out
what they are is by going onto your pension account
online, or you might actually have received an investment guide
(06:53):
or an investment brochure, which will tell you exactly the
different types of investments that are available to you. So
firstly, you want to really check, does this default fund
really meet my needs in terms of my expected retirement
outcomes, my level of risk and my attitude towards risk,
or should I choose my own investments? One of the
(07:14):
most important things to say though is if you do
go ahead and choose your own investments, it's a bit
like you are now on your own. So those investments
don't change throughout time. If you choose to be, say,
a hundred percent invested into one of those equity funds
that we talked about where it's buying money in companies across
the world, then it will stay invested in that fund
(07:35):
until you review it or until you make an investment change.
Kia (07:39):
That's a really good point that you make there. I think,
yeah, if you make that change, now you've kind of
committed to being hands- on to your pension until you
get to the point where you draw down on it.
We've touched on it a bit because you explain the
different types of assets that are available, but can you,
just for our listeners, explain diversification in simple terms? Because
we hear diversifying your risk, diversifying your investments, but can
(08:01):
you explain it in simple terms and what this means
for not just your pension, but also other savings as well?
Michael Porter (08:06):
Definitely. So diversification, in its simplest terms, is not putting
all of your eggs into one basket, so not going
all in on equities or all in into a bond
fund. So if you think about it a bit like
going to a buffet, so actually at a buffet you
would go and try a few different types of food,
(08:27):
and the chances are then that if there's one part
of that meal that you don't like, then there are
going to be other options available to you that you
will like, ultimately. So that's the first thing. And the
other thing I would say is that you should probably
have a balanced diet as well. So not just all
about pension savings, you probably want to diversify where your
(08:47):
savings are invested, because they all serve a different purpose.
So pensions for example, saving into a pension is going
to help you towards saving for retirement. But then if
you've got medium- term savings goals, you might want to
invest in something like a stocks and shares ISA, or
have a cash ISA.
Kia (09:03):
Michael, you are the expert that we needed for this
to break it down. We're going a bit further now.
We hear the words active and passive, and whenever I
think about it in non- financial terms, I'm thinking about
if I'm in the gym, I'm active, if I'm sitting
at home on a sofa, I'm passive. But these have
(09:23):
slightly different meanings when it comes to investments. So what's
the difference between a fund that's actively managed versus one
that's passively managed?
Michael Porter (09:32):
So an active fund is where you have a fund
manager that is actively looking to find different investment types
or investment opportunities. So they would go out and they
would research companies. So if you're talking about an equity
fund, they'd go out and research the companies and then
identify those that they want to put into their investment
(09:52):
fund. So for a passive fund, that's where an investment
manager or a fund manager would invest into every company
that is listed on a particular stock exchange or within
an index. So if you invest in a UK equity
index fund, let's say, the index is the FTSE All-
Share. Now that is made up of the top 600
(10:13):
companies within the London Stock Exchange, which is about 2000
companies. What your passive fund tries to do is it
tries to match the performance of all of those companies.
So it will hold those companies based on their relative
value, and then you'll see your fund go up and
down depending on how all of those companies in combination
(10:34):
perform. So active funds tend to hold less companies or
less investments, which might mean that it has a greater
amount of risk that we talked about because it's less
diversified, but a passive fund, because it would hold more
of those companies or investments, it will be potentially less
(10:55):
risky. But that's not to say that it wouldn't go
down in value.
Kia (10:59):
I'm interested then, off the back of that, or the active
fund, because there is someone who's actively going out there
and researching, is there a difference between the two funds,
for example, maybe in the fees because you have someone
who's actively working on that?
Michael Porter (11:11):
So active funds tend to hold a bit more of
an investment cost to them. So there are fees that
are charged as a result of it, which it's either
called an investment management charge or a fund management charge,
because they are having to go out, meet with companies,
they're having to do their investment research, they have analysts
that do all of the investigation and research, whereas a
(11:34):
passive fund, there's much more automation that's involved. So as
it tries to track the performance of companies, it will
buy and sell those companies based on how they perform
on a daily basis, which is far more automated, and
as a result, they tend to be a bit cheaper.
Kia (11:48):
Okay, that's good to know. Thank you so much. When
you're looking at your pension savings and investments, can you
see which companies your money's actually invested in? Can you
see the breakdown or is it more of like an
overview of where your money is?
Michael Porter (12:01):
So the first thing you probably want to do is
log into your pension account online. That's if your pension provider
or your pension scheme has that facility available. If you
don't know who your pension provider is, the best thing
to do is go and speak to your HR department
and they will point you in the right direction. But
once you've been able to register and you've got access
(12:21):
online, you can then see where your money is invested.
So what's the default fund that it holds? Typically, there's
also an investment guide that comes alongside your pension. So
you want to have a read of that pension guide
or the investment guide to find out what's the investment
strategy. Once you've identified that, if you want to even
delve a little bit deeper and really find out whereabouts
(12:43):
your pension savings are invested, pension schemes tend to offer
something called a fund fact sheet. And a fund fact
sheet is basically just telling you what's the name of
the fund, what's its objective, where is it invested, how
is it performed, what's its level of risk as well,
and you might even get to see the top 10
(13:03):
holdings of a fund. So it might be invested in
the top 10 companies within the FTSE 100, for example. Also,
the other thing to note is that if you're invested
in one of these passive funds, the chances are you're
going to be invested in all of those companies that
will be held within that index.
Kia (13:20):
That's good to know. So Michael, the stock market has
seen a dramatic ride in recent years, so should people
be worried that their pension savings won't grow very well,
or that it might be better to save their money
in a savings account or a cash ISA?
Michael Porter (13:34):
The last few years, we've seen quite a lot of
market turbulence, as we would call it. So that's where
investment markets have gone up and down. Now that's been
as a result of Brexit. We've had the Russian war
in Ukraine. We've had a lot of political uncertainty, and also COVID
as well. So these have been unprecedented times, really. But
the main thing to note is that your pension savings,
(13:58):
they're a long- term investment, so you're investing for a
long time, over 30, 40 years. So it's important that you
don't make any rash decisions. You might expect to see
your pension savings go down in the short term, but
history shows us that over the long term, they tend
to do quite well from a performance perspective. But again,
(14:18):
not guaranteed, can still go down and you might actually
get back less than you put in, but typically, they
will grow.
Kia (14:25):
When it comes to fees and charges, I know we
touched on it a little bit, but what are the
fees and charges that we can expect on pension savings,
and how do they differ across different fund types?
Michael Porter (14:39):
There are lots of different types of fees, and they
might be charged in different ways, but typically the two
main ones are investment fees that we talked about earlier,
or a fund management charges, and then there's also an
administration fee. So this is the cost of the operational
servicing of your pension scheme as you change your address
or whatever it might be that you're getting in touch
(14:59):
with your pension administrator for. Investment charges can differ between
investment types as well. So the active funds that we
talked about earlier, they can tend to be slightly more
expensive. Passive funds can be slightly cheaper, and they also
differ across different investment types. There are some other charges.
You have something called additional fund expenses and transaction costs.
(15:22):
It's important that you know that these aren't charged by the pension scheme
provider or by the fund manager. They're the cost of
buying and selling the investments. So it's important that you
don't frequently switch funds. So when we talked about earlier,
can you choose a different investment from the default? Yes,
you absolutely can, but you incur a cost as a
result of switching, and frequently switching is going to eventually
(15:45):
reduce the amount of money that you have at the
end when you come to retire. And an example of
that is like baking a cake. So if you go
to bake a cake and you're constantly opening the oven
door, you're letting some of that hot air out and
it might not rise as much as you might expect.
So keep that door closed, let the oven do its
thing, and then you can experience what the cake is
(16:07):
like once you open it and the time finishes. But it
is important to say that different ovens, so if we
think about ovens as the investment types, different ovens would
cook at different speeds and you might get a different
outcome each time, and you're not always guaranteed to get
back what you put in.
Kia (16:21):
Michael, you have some of the best analogies that I've
come across when it comes to explaining difficult financial jargon.
Keep going. I always want to just ask you more
questions so you can give me more analogies. That is great.
Michael Porter (16:32):
I've got more.
Kia (16:33):
I know you've got them loaded up. It was good.
But before we end this episode, because you've shared so
many amazing tips, can you share our listeners your top
three tips on workplace pension investments?
Michael Porter (16:44):
Yep, absolutely. So it's important to remember that pensions are
a long- term investment. Don't make any rash decisions. You
might expect to see it go up and down, so
don't react based on short- term changes. Secondly, the sooner
you start saving, the more time that you give for
your investments to grow, and it's important that you start
early. And then finally, can you save a little bit
(17:05):
more? So are you making the most of that employer
matching contribution? Can you add a little bit extra in?
Or as you get a salary increase, maybe you might
be lucky enough to get a pay rise, could you put a
little bit of that towards your pension savings? Ultimately, putting
a little bit more aside today or sacrificing a little
bit today will only benefit you when you come to retiring.
Kia (17:27):
Michael, thank you so much for coming onto the podcast.
You have been incredible breaking down workplace pensions in such
simple terms for us to understand. Between your episode and
the two episodes with Kim, I think we have got
pensions down to a tee. So thank you so, so much.
Michael Porter (17:42):
Thanks.
Kia (17:43):
There's lots of useful information to help us get engaged
and grow our workplace pension. Next time, we're talking all
about parenting and finances with Charlotte Jessup from Looking After
Your Pennies. I'd love it if you could review the
podcast, spread the word, and help others get a little bit richer too.
Keep up with the show on TikTok and Instagram at Legal & General.
Thank you for listening. See you soon.
Hey, it's Kia. We've talked a lot on this podcast
about the importance of workplace pensions. Kim Brown did two
great episodes with me on getting to grips with your
workplace pension and why they matter so much. But today,
we're diving deeper into how your pension is invested. If
you've been saving into your workplace pension and wondering about
its performance, this is the episode for you. So what
(00:22):
does your dream retirement look like? Holidays twice a year,
being completely mortgage free, or having the money to pay
for your grandkids' education? Well, however your ideal retirement looks,
knowing where your money is invested and how it's growing
for you is going to be crucial. Welcome to another
episode of A Little Bit Richer, brought to you by
my friends at Legal & General. Today, we have another expert
from Legal & General, Michael Porter. Michael heads up the Workplace
(00:45):
Pension Product Team at Legal & General, so he's the right
man to explain more on how pension savings are invested,
changes you can make, and how investment risk is defined.
Welcome, Michael.
Michael Porter (00:57):
Thank you, Kia. Nice to be here.
Kia (00:59):
I'm really excited to have you here and talk about
one of my favorite topics ever, pensions. So first things
first, can you explain more about how your pension savings
are actually invested?
Michael Porter (01:08):
Absolutely. So the first thing to understand is that your
pension savings are invested, as you say in your question.
Your pension savings aren't held in a bank account or
a cash savings account, so where it gathers interest and
the value tends to go up and not down. Pension
savings are pooled together with other pension saver money, and
(01:29):
they then are invested into something called an investment fund,
which buy and sell different types of investments, which I'll
come on to explain later. But the value of those
can go up and down.
Kia (01:40):
I think when it comes to pensions, they're such a
great tool when it comes to planning for your retirement
and having that money stored there, but it can be
quite confusing. So I'm glad that you broke it down
for us. But let's get a bit deeper then. So
can you talk a bit more about investment risk and
what that actually means? Because I think when we talk
about investments and pensions, retirement, you want to make sure
(02:01):
that you've got that secure cushion there. So when you
hear the word risk, you get a bit scared, but
what does that actually mean?
Michael Porter (02:07):
So the first thing to note is that there are
different types of investments that your pension savings might buy.
There are equities, bonds, property, cash, or a combination of
those. Now equities are where your money gets put to
good work by investing into companies, and those are typically
listed on a stock exchange, and the value of those
(02:28):
companies goes up and down depending on how they perform.
Then you've got bonds. Bonds are basically companies or governments
that are taking out a loan, and with that loan,
they pay interest on the amount of money that is
being borrowed, and then at the end of that loan,
once it matures, they pay back the original amount of
that loan. You then have property. Property is investing into
(02:52):
commercial real estate or commercial properties. So that might be
a factory, a commercial unit, it could be an office
block. And when an investment fund purchases one of these
types of properties, the value of that property goes up
and down. But also, those properties tend to be let
out and then they receive rental income, which all goes
(03:13):
towards helping your savings grow. Then you have cash, and
cash isn't physically held cash, so it's not like cash under a
mattress. It's held on something called overnight deposit. Now that
might be with a financial institution or it might be
with the government, and they tend to be a bit
more secure. They're not guaranteed to not go down, but
(03:33):
they are a bit more secure. And then you have
a combination. So some investment funds might not be specific
to one of those types of investments. They might hold
multiple investment types, and those tend to be called multi-
asset funds or diversified funds, diversified growth funds. Then risk.
Different investments have different levels of risk. So basically what
(03:55):
risk means is it's the likelihood that the value of
your pension savings might go down. Now they go up
and down all the time, but in the shorter term,
it's all about how likely is your money going to
go down the following day or that particular day, and
that's what we call volatility. So one of the benefits
of having a pension is that your monthly savings go
(04:16):
into buying these investments. Now, you might have heard of
something called pound cost averaging. What this basically means is drip-
feeding your money into pension savings, and some months you'll
be buying investments when they're lower, sometimes you'll be buying
investments when it's higher. This smooths out your investment experience
and reduces the level of risk attributed to your funds,
(04:37):
but ultimately, it averages out and it reduces the amount
of risk that your pension savings have. You can think
about it a little bit like British weather, particularly in
summertime, when there might be dry days, there might be
wet, rainy, cold days. But if you look back across
history, typically, summer tends to be warmer, hotter, and drier
(04:58):
more often than not. So that's the benefit of pound
cost averaging. So sometimes your money might go in and
you're buying investments at higher cost, sometimes you'll be buying
them at a lower cost, but ultimately it averages out
and it reduces the amount of risk that your pension
savings have.
Kia (05:13):
So that is a good thing to note there. So thank you
for telling us about that. You've done a really good
job at breaking down the different assets that can come
with an investment fund. So can you explain to us
a bit more when it comes to workplace pension, where
are our savings usually invested?
Michael Porter (05:31):
So your savings are automatically invested somewhere. So that tends
to be called a default fund, or you might also
see it referred to as a default investment option. Now,
there are different types of default investment options. It might
be a single fund or it might be a combination
of different types of funds that leads to an investment
strategy. So you have somebody that's there managing your funds
(05:55):
and your investments on your behalf. So you've got the
safety and comfort in knowing that your pension is invested
by an expert. It's managed and it's looked after. It's
not guaranteed in terms of it may still go down
because in investments markets, you do get turbulence and you
do get volatility in the shorter term. But over the
longer term, equities, for example, they've proven typically to outperform
(06:19):
cash savings accounts.
Kia (06:21):
So when it comes to your pension, especially the workplace
pension, is it best to leave the investing decisions to
the experts and use the default fund that your pension
company offers?
Michael Porter (06:31):
So, generally, default funds are most appropriate for the majority
of investors. However, if you do want to take that
little bit of extra risk, there are different investment options
available for you, and the best way to find out
what they are is by going onto your pension account
online, or you might actually have received an investment guide
(06:53):
or an investment brochure, which will tell you exactly the
different types of investments that are available to you. So
firstly, you want to really check, does this default fund
really meet my needs in terms of my expected retirement
outcomes, my level of risk and my attitude towards risk,
or should I choose my own investments? One of the
(07:14):
most important things to say though is if you do
go ahead and choose your own investments, it's a bit
like you are now on your own. So those investments
don't change throughout time. If you choose to be, say,
a hundred percent invested into one of those equity funds
that we talked about where it's buying money in companies across
the world, then it will stay invested in that fund
(07:35):
until you review it or until you make an investment change.
Kia (07:39):
That's a really good point that you make there. I think,
yeah, if you make that change, now you've kind of
committed to being hands- on to your pension until you
get to the point where you draw down on it.
We've touched on it a bit because you explain the
different types of assets that are available, but can you,
just for our listeners, explain diversification in simple terms? Because
we hear diversifying your risk, diversifying your investments, but can
(08:01):
you explain it in simple terms and what this means
for not just your pension, but also other savings as well?
Michael Porter (08:06):
Definitely. So diversification, in its simplest terms, is not putting
all of your eggs into one basket, so not going
all in on equities or all in into a bond
fund. So if you think about it a bit like
going to a buffet, so actually at a buffet you
would go and try a few different types of food,
(08:27):
and the chances are then that if there's one part
of that meal that you don't like, then there are
going to be other options available to you that you
will like, ultimately. So that's the first thing. And the
other thing I would say is that you should probably
have a balanced diet as well. So not just all
about pension savings, you probably want to diversify where your
(08:47):
savings are invested, because they all serve a different purpose.
So pensions for example, saving into a pension is going
to help you towards saving for retirement. But then if
you've got medium- term savings goals, you might want to
invest in something like a stocks and shares ISA, or
have a cash ISA.
Kia (09:03):
Michael, you are the expert that we needed for this
to break it down. We're going a bit further now.
We hear the words active and passive, and whenever I
think about it in non- financial terms, I'm thinking about
if I'm in the gym, I'm active, if I'm sitting
at home on a sofa, I'm passive. But these have
(09:23):
slightly different meanings when it comes to investments. So what's
the difference between a fund that's actively managed versus one
that's passively managed?
Michael Porter (09:32):
So an active fund is where you have a fund
manager that is actively looking to find different investment types
or investment opportunities. So they would go out and they
would research companies. So if you're talking about an equity
fund, they'd go out and research the companies and then
identify those that they want to put into their investment
(09:52):
fund. So for a passive fund, that's where an investment
manager or a fund manager would invest into every company
that is listed on a particular stock exchange or within
an index. So if you invest in a UK equity
index fund, let's say, the index is the FTSE All-
Share. Now that is made up of the top 600
(10:13):
companies within the London Stock Exchange, which is about 2000
companies. What your passive fund tries to do is it
tries to match the performance of all of those companies.
So it will hold those companies based on their relative
value, and then you'll see your fund go up and
down depending on how all of those companies in combination
(10:34):
perform. So active funds tend to hold less companies or
less investments, which might mean that it has a greater
amount of risk that we talked about because it's less
diversified, but a passive fund, because it would hold more
of those companies or investments, it will be potentially less
(10:55):
risky. But that's not to say that it wouldn't go
down in value.
Kia (10:59):
I'm interested then, off the back of that, or the active
fund, because there is someone who's actively going out there
and researching, is there a difference between the two funds,
for example, maybe in the fees because you have someone
who's actively working on that?
Michael Porter (11:11):
So active funds tend to hold a bit more of
an investment cost to them. So there are fees that
are charged as a result of it, which it's either
called an investment management charge or a fund management charge,
because they are having to go out, meet with companies,
they're having to do their investment research, they have analysts
that do all of the investigation and research, whereas a
(11:34):
passive fund, there's much more automation that's involved. So as
it tries to track the performance of companies, it will
buy and sell those companies based on how they perform
on a daily basis, which is far more automated, and
as a result, they tend to be a bit cheaper.
Kia (11:48):
Okay, that's good to know. Thank you so much. When
you're looking at your pension savings and investments, can you
see which companies your money's actually invested in? Can you
see the breakdown or is it more of like an
overview of where your money is?
Michael Porter (12:01):
So the first thing you probably want to do is
log into your pension account online. That's if your pension provider
or your pension scheme has that facility available. If you
don't know who your pension provider is, the best thing
to do is go and speak to your HR department
and they will point you in the right direction. But
once you've been able to register and you've got access
(12:21):
online, you can then see where your money is invested.
So what's the default fund that it holds? Typically, there's
also an investment guide that comes alongside your pension. So
you want to have a read of that pension guide
or the investment guide to find out what's the investment
strategy. Once you've identified that, if you want to even
delve a little bit deeper and really find out whereabouts
(12:43):
your pension savings are invested, pension schemes tend to offer
something called a fund fact sheet. And a fund fact
sheet is basically just telling you what's the name of
the fund, what's its objective, where is it invested, how
is it performed, what's its level of risk as well,
and you might even get to see the top 10
(13:03):
holdings of a fund. So it might be invested in
the top 10 companies within the FTSE 100, for example. Also,
the other thing to note is that if you're invested
in one of these passive funds, the chances are you're
going to be invested in all of those companies that
will be held within that index.
Kia (13:20):
That's good to know. So Michael, the stock market has
seen a dramatic ride in recent years, so should people
be worried that their pension savings won't grow very well,
or that it might be better to save their money
in a savings account or a cash ISA?
Michael Porter (13:34):
The last few years, we've seen quite a lot of
market turbulence, as we would call it. So that's where
investment markets have gone up and down. Now that's been
as a result of Brexit. We've had the Russian war
in Ukraine. We've had a lot of political uncertainty, and also COVID
as well. So these have been unprecedented times, really. But
the main thing to note is that your pension savings,
(13:58):
they're a long- term investment, so you're investing for a
long time, over 30, 40 years. So it's important that you
don't make any rash decisions. You might expect to see
your pension savings go down in the short term, but
history shows us that over the long term, they tend
to do quite well from a performance perspective. But again,
(14:18):
not guaranteed, can still go down and you might actually
get back less than you put in, but typically, they
will grow.
Kia (14:25):
When it comes to fees and charges, I know we
touched on it a little bit, but what are the
fees and charges that we can expect on pension savings,
and how do they differ across different fund types?
Michael Porter (14:39):
There are lots of different types of fees, and they
might be charged in different ways, but typically the two
main ones are investment fees that we talked about earlier,
or a fund management charges, and then there's also an
administration fee. So this is the cost of the operational
servicing of your pension scheme as you change your address
or whatever it might be that you're getting in touch
(14:59):
with your pension administrator for. Investment charges can differ between
investment types as well. So the active funds that we
talked about earlier, they can tend to be slightly more
expensive. Passive funds can be slightly cheaper, and they also
differ across different investment types. There are some other charges.
You have something called additional fund expenses and transaction costs.
(15:22):
It's important that you know that these aren't charged by the pension scheme
provider or by the fund manager. They're the cost of
buying and selling the investments. So it's important that you
don't frequently switch funds. So when we talked about earlier,
can you choose a different investment from the default? Yes,
you absolutely can, but you incur a cost as a
result of switching, and frequently switching is going to eventually
(15:45):
reduce the amount of money that you have at the
end when you come to retire. And an example of
that is like baking a cake. So if you go
to bake a cake and you're constantly opening the oven
door, you're letting some of that hot air out and
it might not rise as much as you might expect.
So keep that door closed, let the oven do its
thing, and then you can experience what the cake is
(16:07):
like once you open it and the time finishes. But it
is important to say that different ovens, so if we
think about ovens as the investment types, different ovens would
cook at different speeds and you might get a different
outcome each time, and you're not always guaranteed to get
back what you put in.
Kia (16:21):
Michael, you have some of the best analogies that I've
come across when it comes to explaining difficult financial jargon.
Keep going. I always want to just ask you more
questions so you can give me more analogies. That is great.
Michael Porter (16:32):
I've got more.
Kia (16:33):
I know you've got them loaded up. It was good.
But before we end this episode, because you've shared so
many amazing tips, can you share our listeners your top
three tips on workplace pension investments?
Michael Porter (16:44):
Yep, absolutely. So it's important to remember that pensions are
a long- term investment. Don't make any rash decisions. You
might expect to see it go up and down, so
don't react based on short- term changes. Secondly, the sooner
you start saving, the more time that you give for
your investments to grow, and it's important that you start
early. And then finally, can you save a little bit
(17:05):
more? So are you making the most of that employer
matching contribution? Can you add a little bit extra in?
Or as you get a salary increase, maybe you might
be lucky enough to get a pay rise, could you put a
little bit of that towards your pension savings? Ultimately, putting
a little bit more aside today or sacrificing a little
bit today will only benefit you when you come to retiring.
Kia (17:27):
Michael, thank you so much for coming onto the podcast.
You have been incredible breaking down workplace pensions in such
simple terms for us to understand. Between your episode and
the two episodes with Kim, I think we have got
pensions down to a tee. So thank you so, so much.
Michael Porter (17:42):
Thanks.
Kia (17:43):
There's lots of useful information to help us get engaged
and grow our workplace pension. Next time, we're talking all
about parenting and finances with Charlotte Jessup from Looking After
Your Pennies. I'd love it if you could review the
podcast, spread the word, and help others get a little bit richer too.
Keep up with the show on TikTok and Instagram at Legal & General.
Thank you for listening. See you soon.
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