Your pension provider will usually invest your money in your pot into a range of investment funds. There is a risk that these will rise or fall, and this is why as you approach the time when you’re due to retire you may want to consider moving your money into lower risk funds to avoid the risk of a significant fall in the value of your assets just before you retire.
With most pensions, unless you’re taking a DIY approach and managing your investments yourself, your money usually goes into a ‘default fund’ which transfers your money into lower risk investments automatically as you near retirement. This fund might not always be the best option for you however, so you’ll need to be proactive and check where your money is invested. Find out more in our article Where is my pension invested?
When you pay into an ISA, you can either pay your full £20,000 allowance into investments, cash, or peer-to-peer lending, or you can split your allowance between a combination of these options. Our article Best cash ISA rates: Which cash ISAs pay the most interest? explains which cash ISAs pay the best returns if you don’t want to take any risks with your money. Bear in mind, however, that cash ISA returns can still be impacted by soaring inflation, which erodes the purchasing power of your cash. Learn more about this in our guide What does inflation mean for my money?
If you choose an investment ISA, lots of investment services now provide a selection of ready-made investment portfolios, some of which are aimed at novice investors, whilst others target more sophisticated investors, who might be comfortable accepting a higher level of risk in the hope of potentially higher returns. You’re directed to a portfolio that should be suitable for you after answering a series of questions. These questions typically focus on your approach to risk (how much can you afford to lose), your financial objectives, and your investment timeframe (how soon you might need to access your money). You can find out more about these services in our article What is robo-advice?
Learn more about how each of these different options work in our guide Everything you need to know about ISAs.