We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

How do I Choose the Best Pension Asset Allocation?

John Lister
By
Updated: May 17, 2024
Views: 2,964
Share

Pension asset allocation refers to both the way in which money invested to produce a retirement income is allocated, and the process and strategy that leads to these allocation decisions. Choosing the best pension asset allocation depends on the type of pension scheme in question. Individuals will usually follow a strategy of taking higher risks in the early years of the pension, then switching to more secure investments as retirement approaches. People operating a large-scale pension scheme, such as for the employees of a company, will usually carry out a pension asset allocation strategy that aggregates the individual approach, but also takes account of legal and financial requirements.

All forms of pension asset allocation aim to avoid going too far towards one of two extremes. An overly cautious approach will mean the pension fund grows so slowly that it offers little or no advantages over having simply saved the money in a risk-free format, beyond any tax benefits that may come with retirement savings. An overly risky approach runs the risk of the fund either outright losing money, or making so little profit that risk-free savings would have been a better option.

Most financial experts thus recommend pension asset allocation based on diversification. This refers to having a range of different investments in two senses. One is to have different types of investment, such as debt securities, equity securities, mutual funds, and property. Another is to have a wide range of individual investments of each type. For example, stock investments could cover individual stocks from different types of businesses, some stable and relatively secure, and others more high risk, plus index-based investments that perform in line with the stock market as a whole.

Another common recommendation for individual pension asset allocation is to change the strategy over time. In the early years, higher-risk investments are often favored; those that pay off will produce returns that have longer to grow, while those that don't pay off immediately can be left for longer in the hope of a recovery. In the years running up to retirement, most advisors favor switching to more secure investments such as government and securely-rated corporate bonds. This offers more predictability about the final pension that can be paid from the investments.

Corporate pension asset allocation is more complex as it tries to bring together the appropriate strategies for each individual. This means that the particular strategy in any one year will depend on the demographics of the workforce. Fund managers may also be influenced by accounting requirements. It may be necessary to include a high proportion of more secure investments, as this allows the company to show more certainty that the fund will be able to meet its liabilities.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.

Editors' Picks

Discussion Comments
John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
Share
https://www.wisegeek.net/how-do-i-choose-the-best-pension-asset-allocation.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.