Self-directed pensions: Greater choice, flexibility and control
Pension planning is generally a long-term exercise, and investment decisions should remain connected to a clear overall strategy. The ability to review and adjust an investment strategy can be very valuable during periods of economic or market change. Photo: iStock
, director of Quest Retirement Solutions Ltd, explains how self-directed pension give greater choice to pension owners
When people think about pensions, they often picture a standard off-the-shelf type pension taken out many years ago and not far off forgotten about until they come to retirement. However, pensions do not have to follow a one-size-fits-all model.
For those who want to take a more active role in planning for retirement, a self-directed pension can offer greater choice and flexibility over how their money is invested.
A self-directed pension allows an individual, usually with the support of their financial adviser, to select from a much wider range of investments. These can include investment funds, shares, bonds, exchange-traded funds, cash deposits and property (this is not an exhaustive list).
The key difference between an off-the-shelf product and a self-directed pension is choice. Rather than being limited to X amount of funds on offer, individuals can build an investment strategy that reflects their circumstances, financial goals, investment experience, attitude to risk and expected timeframe to retirement.
Our financial needs and priorities rarely remain the same throughout our working lives. Someone in their thirties may have a very different outlook from a person who is approaching retirement, while an individual drawing an income in retirement will have different requirements again.
A self-directed pension approach allows a pension investment strategy to evolve over time. An individual with many years remaining until retirement may be comfortable accepting a greater level of investment risk in pursuit of long-term growth. As retirement gets closer, they may choose to gradually reduce that risk or hold a larger proportion of the pension in cash or lower-risk assets.
The ability to review and adjust an investment strategy can be particularly valuable during periods of economic or market change. However, flexibility should not be confused with frequent trading or reacting to every short-term market movement. Pension planning is generally a long-term exercise, and investment decisions should remain connected to a clear overall strategy.
One of the most valuable principles in long-term investing is diversification.
Diversification simply means avoiding an over-reliance on any single investment, company, industry, geographic region or type of asset. Instead, pension funds can be spread across a range of investments that may behave differently in changing market conditions.
For example, a pension portfolio might include a combination of equities, bonds, property-related investments, cash and professionally managed funds. Within an equity allocation, investments could also be spread across different companies, sectors and regions.
The objective is not to eliminate risk, as no investment strategy can do that, rather, diversification can help manage and mitigate risk by reducing reliance on one asset class.
If all pension savings are concentrated in one share, one property or one particular market, the end outcome depends heavily on the performance of that individual investment. A diversified portfolio is less reliant on any one asset delivering the expected result.
Diversification does not guarantee positive returns or prevents losses; its value lies in creating a more balanced approach and helping investors avoid having “all their eggs in one basket”.
The flexibility offered by a self-directed pension is attractive, but it is not necessarily suitable for everyone.
Having a wider investment choice brings additional responsibility. Investments must be properly researched and considered in the context of the individual’s complete financial position. Costs, liquidity, investment risk, income requirements and the length of time until retirement should all form part of the decision-making process.
Liquidity is particularly important. Some investments can be bought or sold relatively quickly, while others, such as direct commercial property, may take considerably longer to sell. An investment may appear attractive, but it must also be suitable for the pension holder’s future income and retirement needs.
A pension should also be reviewed regularly. An investment strategy that was suitable five or ten years ago may no longer reflect a person’s circumstances, particularly following changes in employment, family life, financial commitments or retirement plans.
Self-directed does not have to mean unsupported.
A regulated financial adviser can help an individual understand the available pension structures, establish their attitude and capacity for risk, and develop an appropriately diversified investment strategy. The adviser can also provide ongoing reviews to ensure the pension remains aligned with the person’s objectives.
The pension provider or qualifying fund manager then provides the structure through which permitted investments are held and administered, subject to the relevant pension, Revenue and regulatory requirements.
At Quest Retirement Solutions, we work exclusively with regulated financial advisers throughout Ireland to provide flexible, self-directed pension structures, including Personal Retirement Savings Accounts, Personal Retirement Bonds and Approved Retirement Funds.
The aim is to give pension holders greater flexibility over their retirement savings while ensuring that the appropriate administrative and regulatory framework remains in place.
For individuals who want greater involvement in their retirement planning, a self-directed pension can offer meaningful choice and control. When supported by professional advice, appropriate diversification and regular reviews, it can provide a flexible foundation for building — and ultimately accessing — retirement savings.
As with all investments, values can fall as well as rise, and past performance is not a reliable guide to future performance. Individuals should seek professional financial advice before making pension or investment decisions.
