Best investments for a self-employed pension - whatever your age

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

If you're self-employed, you don’t benefit from employer pension schemes with a default investment option. That means it's your job to decide how to invest through your self-invested personal pension (SIPP). This can feel daunting, but there's a lot of help out there. It's also simpler than you may think once you learn the basics.

In this article, we'll show you how to build an investment portfolio, share some fund ideas, and highlight key investing mistakes to avoid.

• Open a Self-Invested Personal Pension (SIPP)
• See our current offers to help make your money go further

Why holding cash is costly

A big mistake is keeping too much cash in your pension. While cash feels safe, it loses value over time due to inflation. For example, if inflation is 3% a year, £10,000 in cash today will only be worth around £5,500 in real terms after 20 years. Investing helps your money grow and preserve its purchasing power.

Why choosing the right funds matters

Your pension's success depends on the funds you pick.

Good investment choices can compound over decades, while poor choices - or no choices - can leave your retirement pot stagnant. Fortunately, there are well-diversified, low-cost options that suit most self-employed savers.

Core principles for pension investing

Whether you're 25 or 55, the fundamentals remain the same:

• Start as soon as you can: The earlier you invest, the more time your money has to grow.
• Stay consistent: Regular contributions help to smooth out market ups and downs.
• Think long-term: Pensions are a decades-long journey, not a sprint.

Risk tolerance and age: what you need to know

Your age plays a key role in how much investment risk you should take. Younger savers can afford more risk because they have time to recover from market dips.

Older savers usually prefer more stability to protect what they've built.

Diversification: don’t put all your eggs in one basket

Diversification means spreading your investments across different assets, like stocks and bonds, and across different global markets to reduce risk. A well-diversified pension is generally less likely to suffer big losses from any single market event.

Balancing stocks and bonds

Stocks could offer better opportunities for growing your money, while bonds provide steadier but often slower returns. A common rule of thumb is to subtract your age from 100 to find your ideal stock allocation. For example, a 40-year-old might hold 60% in stocks and 40% in bonds. However, in reality, these allocations may be too low for people to achieve the retirement they want, and pension savers often allocate more to stocks than the “100 minus your age” rule of thumb would suggest.

Best types of funds for a self-employed pension

Our Select 50 is a good place to start for SIPP investment ideas. This is a list of our 50 favourite funds.

A core part of many SIPP portfolios will be a low-cost global index fund. These track the performance of global stock markets and charge minimal fees. So, if the value of global stocks markets goes up, the value of your investments should go up.

On our Select 50 list, there is the Legal & General Global Equity Index Fund, which charges just 0.13%

Alternatively, you could look for a fund that combines stocks and bonds in one wrapper for you. Fidelity’s Retirement Builder is single, medium-risk, low-cost fund that aims to achieve stable growth over the medium to long term (ideally, at least five years). Currently around 60% of the portfolio is invested in stocks and around 40% in bonds.

• See our Select 50: our favourite funds - selected by experts
• Read our article on Index fund ideas from our Select 50

How to review and rebalance your pension

Your plan will likely shift as you age as younger savers can often afford more risk. For example:

In your 30s and 40s:

Most people focus on growth with a higher stock allocation. Alongside a global stock market fund, you might look at funds focused on emerging markets or smaller companies. These areas may offer higher growth, although they do come with more risk.

On our Select 50 list, there is the iShares Core MSCI EM IMI UCITS ETF, which tracks the performance of emerging market stocks, and the Vanguard Global Small-Cap Index Fund, which tracks the performance of a basket of smaller companies around the world.

In your 50s and 60s:

Some investors will gradually shift their portfolio towards bonds and lower-risk assets to avoid big falls in the lead up to retirement. The iShares Overseas Government Bond Index Fund, one of our Select 50, is a low-cost way of getting access to government bond markets.

But it's wise not to abandon risk entirely. If you plan to use drawdown to access your pension, you may want to keep a fair part in stocks and shares because they usually offer better growth than bonds or cash. 

It's a good idea to review your pension at least every year.

You might need to rebalance if one type of asset grows faster than another. For instance, if shares climb more than bonds, you might sell some of your shares and buy more bonds to get back on track.

Checklist: common mistakes to avoid

• Too much cash: Inflation can quietly eat away at its value.
• Chasing short-term returns: Timing the market is tough, and trying to do so can lead to losses. A simpler, and often safer, approach is to drip-feed your money into the market each month.
• Skipping reviews: Your pension needs regular check-ins to stay on track.

So how much should you be saving into each of these funds? Read our article on how much to save for retirement if you’re self-employed here.

• Get our updates on markets, ISA funds, pension saving and much more

Check out our other articles in this series:

• Read: I’m self-employed - how much should I save for retirement?
• Read: Pension, ISA or property for the self-employed: which is better?
• Read: 5 big tax breaks the self-employed miss out on
• Read: Self-employed and pensions: how to get started with a SIPP