Use your freedom of choice

Pensions: Investment strategy
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One of the little-known secrets about personal pensions is how much choice policyholders have to pick their own investment strategy.

Of the billions of pounds that flow into personal pension funds every year, 90 per cent goes straight into mainstream "managed" or "with-profits" funds.

Few personal pension holders in the UK take the time to examine other choices, even though a pension is the single biggest investment most people make in a lifetime.Yet nearly all pension providers now allow planholders to review their investment on a regular basis.

As you get closer to retirement you should reduce the level of risk to which your money is exposed. When you are five years away from being a pensioner, it is simply too dangerous to leave your pension savings in a volatile fund even if it is rocketing upwards in value. It could just as easily plummet in value just before you retire, leaving you with a meagre income for the rest of your life.

rWith-profits and unitised with-profits plans are the low-to-medium risk investment choice that most people pick. Money is invested in a mix of investments - gilts, stocks and shares and property. Profits made by these investments are accrued to the plan each year in the form of a reversionary bonus - a value which cannot be taken away from the plan, such that the value of your pension pot only rises.When the plan matures, a final bonus is added.Its size varies significantly from one company to the next. A unitised with-profits plan runs on similar lines, with money allocated to units in the with-profits fund.

rUnit-linked managed funds also invest in a three-way split of property, shares and bonds, and are considered medium-risk. However, unlike with- profits plans, unit-linked policies do not benefit from the addition of guaranteed bonuses each year. The value of the units will rise and fall in line with the value of the underlying assets.

Self-invested personal pensions or Sipps are really only suitable for the financially sophisticated, offering the greatest freedom of choice and the highest potential risk. They can invest in anything that produces an income.

Copies of the Money Marketing 1995 Unit-Linked and With-Profits Surveys are available on 0171 439 4222 and are priced at pounds 3 each.

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