When it comes to establishing a pension, you might be patting yourself on the back for being so financially proactive. But the next step is deciding what exactly that pension should look like, and that’s where it gets somewhat complex. So, what are the range of investment options open to pension scheme members and how should they go about making their choices?
According to Shane O’Farrell, director of workplace markets, employer solutions at Irish Life, the investment fund suite for anyone starting a pension will cover all the traditional options, from high-risk all equity funds to a low-risk cash fund. “There is also a range of multi-asset funds with different levels of risk so that pension savers have a good balance of options to meet their risk appetite, both now and into the future,” he explains.
All investment funds have risks and those used for pensions are no different, O’Farrell stresses. “The main risk for higher-risk and growth funds is that the value can fall, with no guarantees of recovery,” he explains. However, he also notes that a well-constructed high-risk or high-growth fund will deliver long-term positive returns well in excess of inflation.
“People in the early stages of the journey are encouraged to invest in higher-risk funds. These are expected to perform far better than inflation and even if the fund does drop in value, there is lots of time for recovery and growth.”
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When someone opens a personal retirement savings account (PRSA), they typically receive advice from a financial adviser as standard. A core part of the advice process, O’Farrell explains, is a risk profile assessment, specifically designed to understand the customer’s comfort level with investing and ensure that the recommended investment strategy aligns with their risk tolerance.
“Recent Irish Life research shows an interesting trend, with men tending to take on more investment risk than women when selecting their PRSA pension funds, particularly those under the age of 40,” he notes. “This highlights the importance of personalised advice and tools that help every saver make informed decisions based on their own personal goals and comfort level.”
Peter Daly, head of multi-asset solutions at Davy, explains that with a PRSA, most providers offer pooled multi-asset funds, which will give an investor a well-diversified mix of assets aligned to their risk level and long-term goals.
“With a PRSA, you can invest in a huge range of funds, exchange-traded funds, even individual stocks,” he says. “It’s a good idea to work with an adviser here, just to make sure your strategy fits your timeline and risk appetite. But it does open the door to a wider choice of investments that you might not get with a pooled fund.”
Indeed, a significant advantage of PRSAs is the ability to allocate to alternative asset classes that can offer substantial returns during periods when both stocks and bonds are misbehaving.
“Just keep in mind, these kinds of investments are more complex, some can be less liquid and come with their own risks, so again, having an adviser in your corner is really important,” Daly says. “While it’s natural to want stability, it’s also important to make sure your money is working hard enough over the long haul.”
