How is your pension invested?

A 2 minute read

New Royal London Blog

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Published on

3 September 2021

How is your pension invested?

Firstly, remember, there are two big goals that your pension fund manager has for your money while you are busy working: to keep it safe and to help it grow.

These priorities are important to keep in mind when you’re taking a read through the rest of this article.

So, what happens the moment your pension contribution leaves your pay packet?

It’s not quite as simple as you’d think… most people reckon their contribution gets combined with their employer's contribution, invested directly in the global stock market, and then paid back to you in 30 to 40 years’ time. But that’s not quite what happens…

Think of your pension contribution as going into something like an upside-down funnel. The money goes in the narrow bit at the top and then is spread out across a range of investments, going through several stages in between… we’ll take a look at these now.

If you have a Royal London pension (you can check this with your employer), the chances are you are invested in the ‘default’ investment. This is the where workplace pension scheme members are automatically enrolled when they join.

Once your contribution is received, it is automatically invested by the asset managers we use (the main one is Royal London Asset Management, our wholly-owned subsidiary).

The default investment strategy is called the Balanced Lifestyle Strategy. Not all this money is invested in one place, some goes into ‘equities’, which is buying shares in companies all over the world. It also goes into ‘property’ by purchasing buildings and offices all over the UK. It can also be used as loans to companies, or even the government, by purchasing ‘bonds’

The spreading out of your money in this way is good for two reasons. Firstly, it limits risk, as if one part of the market goes through a rough patch, at least there is some money in another area that might just be performing better. Secondly, it gives your retirement savings the biggest possible chance of rising in value over the years, with the aim of giving you a decent-sized pot when you stop working.

This investment approach is reviewed frequently to make sure it is still achieving its goals on your behalf. Pensions can be invested for decades, after all, and markets and strategies for long-term growth and risk management change over time, so your investment approach should too. Although as with any kind of investing, your capital is at risk with a pension, even with a careful strategy in place.

This is why tweaks are made by the pension fund managers if necessary, along the way.

To find out more about how your pension is invested you can visit The Secret Life of Pensions content hub:

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