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On joining a retirement fund, you may be presented with a choice of investments – about 64% of funds offer investment choice.

Some funds offer a limited choice of investments – for example, a choice of two or four funds – while others, particularly retirement annuities (RAs), offer you an array of funds through an investment platform or linked investment services provider. Those that do not offer a choice have pre-selected an investment strategy for you, relieving you of the responsibility of making the choice or getting advice in order to make a choice. 

Before you choose the underlying funds or portfolios, you should know your retirement savings goals and the return you need to target to reach those goals.

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If you’re a member of an employer-sponsored fund or umbrella fund, the trustees will have chosen a target pension – for example, 75% of your pre-retirement income.

The trustees will also have calculated that you should reach this goal after 35 or 40 years of saving at a particular level of your income, such as 12% of your income, and earning a certain return above inflation, for example 3%.

If you’re self-employed and/or topping up your retirement savings or preserving savings in an RA or a preservation fund, you will either need the help of a financial adviser or access to a retirement savings calculator to determine how much you need to save to reach the retirement income you need by your chosen retirement date.

Your choice of investments should have sufficient exposure to the asset classes that deliver inflation-beating returns in order to achieve the targeted investment return you need to meet your retirement goal.

For example, past returns suggest that to earn a return of inflation plus 5%–7% a year before fees, you will have needed an exposure to equity and listed property shares of between 60% and 75% of your investments.

" Earning just 1% more a year over 40 years can improve your retirement income by 40% "

A lower equity exposure of between 40% and 60% a year would have generated returns of inflation plus 4%–5% a year before fees. Less than that would have generated after-inflation returns of up to 3% only a year.

Although these differences may appear insignificant, earning just 1% more a year over 40 years can improve your retirement income by 40%.

You should also take into account your capacity for investment risk and your tolerance for this risk. Capacity relates to your ability to deal with losses (your investment term and your reliance on the investment), while tolerance is your ability not to lose your cool and disinvest.

If you’re just starting to save for retirement or you still have a long time until you retire (more than five years), you will have the capacity to take the highest exposure to equities. This is because your investments will have time to recover from periods of poor or negative returns.  

If you’re approaching retirement, you may need to reduce your investment risk because your capacity to recover from a market fall is much lower due to your shortened investment horizon.


Some retirement funds, particularly those with only one or a few investment options, offer to automatically adjust your investments to reduce your investment risk as you approach your retirement date. This is known as life-staging and there are broadly three stages: your accumulation stage, your pre-retirement stage and your post-retirement stage.

The accumulation stage is where most of your savings and growth on these savings occurs. It covers the first 30 to 35 years of a 35- to 40-year working life. In this stage, your investments are positioned to earn the highest returns possible without taking on undue risk. During this stage, it is accepted that you can incur temporary investment losses as you have time to recover from them.

The pre-retirement stage typically starts five years before retirement. During this stage, you’re expected to be more averse to investment risk and seeking more certainty about the returns on your investment.

Your investments are therefore adjusted to lower exposures to riskier asset classes such as equities and listed property.

More sophisticated life-staging models try to match your pre-retirement investments to the annuity you will choose after retirement. This is because if you opt for a guaranteed annuity, your pre-retirement investments should have a greater exposure to bonds than if you invest in a living annuity. In a living annuity, you will need greater exposure to equities as you will need your investments to sustain an income for a long period – potentially as long as 30 years.

Your pre-retirement portfolio should then align to the post-retirement portfolio you expect to choose for your living annuity (essentially a high-, medium- or low-equity multi-asset fund or portfolio).

If you’re planning to take one-third of your investments in cash, you may also want this portion of your investments to be closely aligned to cash rather than more volatile equities as you approach retirement.

Retirement funds that do not offer life-staging leave it to you to reduce your investment risk. They may offer unit trust funds or portfolios with lower equity exposure or portfolios with smoothing or guarantees on investment returns and/or capital for members who are approaching retirement.

Life assurers offer what are known as smoothed bonus portfolios, giving you a less volatile return because a portion of the returns delivered when markets are performing well is held in reserve and used to bolster your returns when markets are falling or delivering low returns.

Remember, there is always an additional cost to investments with guarantees or smoothing, so you should carefully consider your need to use these investment strategies.

Regulation 28

Retirement funds are obliged to comply with regulations under the Pension Funds Act. One of these, regulation 28, sets prudential investment limits on asset classes and instruments for retirement funds.

The main limits that you will need to adhere to are: your fund may not have an exposure of more than 75% to equities, 25% to offshore markets and 25% to listed property.

If you are choosing your own underlying investments for your retirement fund from unit trust funds or life portfolios offered on an investment platform, the platform provider will inform you if your choice contravenes regulation 28.

Before April 2011, retirement funds had to comply with regulation 28 but individual members did not. If you invested before this date and have not made any changes to, for example, your fund contributions (other than the annual increases agreed to in your contract) or added any lump sums to the fund, your savings can remain in breach of regulation 28.

Regulation 28 compels you to have some diversity across assets classes. A well-diversified investment portfolio is the best hedge against the ups and downs or volatility of investment markets.

Default investment choices

Regulations under the Pension Funds Act now oblige funds to offer you a default investment strategy if you do not want to choose the underlying investments for your savings. These regulations were introduced in September 2017 and existing retirement funds have until April 2019 to comply.

Your fund’s trustees are obliged to design default strategies that are appropriate for all members.

Some retirement funds are developing investment strategies, including default strategies, that are appropriate for you given your unique circumstances. These strategies can take into account:

  • your age;
  • your chosen retirement age;
  • your gender (as women in general live longer than men);
  • how much you have saved to date;
  • how much you are contributing;
  • your dependants;
  • your desired retirement income;
  • other retirement savings and how these are invested; and
  • your likely choice of annuity (monthly pension) at retirement.

Active versus passive

If you have a choice of investments, you may also get to choose between active management of your investments or passive investments that track an index. Alternatively, your choice of retirement annuity or preservation fund provider may determine whether the underlying investments are active or passive.

Remember that passive investments are generally cheaper, but if the choice of underlying fund/s is left to you, you essentially still have to make the decision about which index is a good one to track.

You need to understand whether you are tracking an index that includes shares on the basis of the size and price of shares in the market or some other rules designed to exploit factors such as value or size when these factors deliver market returns. You also need to understand what this investment philosophy means for the returns you will earn.

Your decision should ultimately be based on what you are prepared to pay for your chosen investment strategy and the confidence you have that it will deliver inflation-beating returns after costs, bearing in mind that many active managers do not beat the market and that their investment philosophies will deliver returns in cycles of out- and underperformance of the market.


Investors often believe that to ensure investment success they need to choose the top-performing fund or portfolio. However, switching between the best performer frequently is likely to deliver poorer returns than choosing a fund or portfolio with a track record of delivering more consistently over the longer term.

If you are offered a choice of unit trust funds on an investment platform, the platform will show you the ratings of fund ratings agencies such as Morningstar, Fundhouse or PlexCrown Ratings to help you identify funds that have in the past delivered consistent performance.

Alternatively, your investment platform may have done its own due diligence on the funds and have a “shopping list” of recommended funds.

In rating funds, ratings agencies or investment platforms, consider a variety of factors such as:

  • the investment philosophy, the returns it will deliver and whether the manager is sticking to that philosophy;
  • the stability of the investment team and its experience; and
  • the investment company’s way of remunerating staff and whether the funds the company has launched have good survival rates, meaning they’ve not been closed due to poor performance.

Remember, though, that past performance does not guarantee future performance – there is no reliable way to identify the future winners. This is why some providers offer low-cost index-tracking investments and suggest that you focus instead on the extent to which your returns are reduced by fees.

The costs

If your fund has chosen to provide a limited choice of underlying funds, it has probably done so because providing greater choice typically comes at a higher cost.

And many members fail to exercise that choice or choose inappropriate funds or portfolios, or fail to revisit their choices regularly. 

The cost of providing the administration that comes with member choice is typically deducted from your savings and the fee may not be well disclosed.

Whatever choice of underlying investments you are given, don’t forget to take into account the cost of the underlying funds and what those costs will buy you in terms of consistency of performance.

This guide was written by the Money editorial team at Tiso Blackstar, sponsored by 10X Investments.


10X’S retirement annuity is covered by one, single, all-inclusive fee, and our reporting is clear and in plain language. You always know what you earn, what you pay, and where you are in relation to your goals.

In an industry famous for big promises on a confusing array of products, most of which disappoint, 10X uses a simple, proven strategy to give you the best possible chance of reaching your retirement investment goal: invest 15% of your income for 40 years in a high growth index fund and pay fees of 1% per year or less.

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Index tracking is one of four key pillars in 10X’s simple, award-winning investment strategy. The others are low fees, a diversified portfolio and life stage investing.

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