Everyone has heard of cryptocurrency, often praised as a get-rich-quick investment opportunity in a hyper-modernised market; but is crypto suitable as a retirement fund?
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While some investors have made incredible returns on crypto trades, the challenge is that it’s a fast-moving world and difficult to predict movements with any accuracy.
Although the potential is great, the risk is similarly high, so you should seek independent financial advice if you’re considering investing a proportion of your retirement fund in crypto.
Risks Of Crypto Investment
Crypto investments have skyrocketed, with many currencies and brokerage platforms available with low investment limits.
Many investors are enticed by astronomical returns that blow conventional pension schemes out of the water.
The Financial Conduct Authority (FCA) has warned that consumers may not appreciate the extent of their risk, and 59 per cent have invested so much that they would suffer significant problems if their investment failed.
Pensions are inherently low risk, investing in secure markets and assets that offer stable, gradual returns with a far lower potential of resulting in a loss.
Pension Investments For Higher Returns
We’d all like to stop working in style and have a comfy retirement financial cushion – but choosing the right investment product is vital.
The Centre for Aging Better says that millions within ten years of retirement haven’t prepared financially. The State Pension sits at just 24 per cent of national income averages.
Crypto might look like a solution, but it’s all about balance:
- Saving cash in a bank is safe, but your interest earnings will likely be minimal, even with recent interest rate rises.
- Investing in a listed company on the FTSE 100 carries some risk, but you have regulatory compliance assurance and can conduct extensive research.
- Buying crypto such as Bitcoin or Dogecoin could haul you a much higher profit, but the price fluctuates daily, and the gamble is almost impossible to quantify.
Most financial advisers will recommend long-term retirement investments, with the opportunity to recoup short-term losses and benefit from compounded interest returns if you continually reinvest.
A diversified portfolio means you can incorporate some higher-risk elements but have the offset of other assets with greater stability; it’s never a good idea to put your entire pension pot into crypto.
Why You Should Diversify Retirement Investments
The focus may be on crypto, but countless mainstream investments carry substantial risk:
- Property can seem a stable option, but you could lose a meaningful value if the market stumbles.
- Equity funds in emerging markets are unreliable, although potentially prosperous.
- Commodities can be volatile, from precious metals to industrial materials and consumables such as coffee.
- Alternative Investment Market (AIM) shares are regulated, but to a lesser degree than London Stock Exchange-listed businesses, and carry an increased risk due to the nature of the organisations.
- Forex trading is notoriously complex and is impacted by external political and economic variables.
- Green energy and new technology – including hydropower, hydrogen batteries and AI are popular but equally risky.
This range of higher-risk investment assets means that diversification is the cornerstone of a successful retirement portfolio.
When you mix and match your investments across asset classes, sectors, countries and industries, you’ll be less exposed to heavy losses if something goes wrong.
Your age is also a factor. For example, if you have 30+ years until retirement, you might be comfortable with a higher exposure position than if you need to ensure your fund grows to finance your retirement within the next decade.
Assessing Returns On A Workplace Pension
So many people are dabbling in crypto because some auto-enrolment pensions provide tiny returns that don’t seem worthwhile.
Auto-enrolment is beneficial, offering a growing number of workers some private retirement savings. A typical investment split is around:
- Sixty per cent in company shares and higher risk assets.
- Forty per cent in low-risk cash or government bonds.
Investors with wiggle room need to determine whether that combination fits their goals rather than assume the default investment structure aligns with their retirement aspirations.
For example, a younger investor could make better profits by investing their pension in shares.
Before making any important financial decisions, investors should consider:
- The level of risk they are comfortable with.
- How well they understand the nature of a prospective investment product.
- What protection is in place to safeguard their assets if something goes wrong?
- Whether the investment products they have chosen are subject to regulation.
- The value of independent financial advice.
Pensions are longer-term investments, so there is often an opportunity to change your investment allocations to improve your prospects of earning a higher return – but the extreme risk of the volatility of crypto isn’t for everyone.
Workplace Pension Trustees Attitude to Crypto Investments
A pension fund is managed by the scheme trustees, who decide if they invest some of the portfolio into crypto – hedging inherent risks such as inflation and opening up the potential for higher returns.
The difficulty here is that a trustee won’t make this decision lightly, given the legal requirements.
- Trustees have varying levels of investment power, determined by the scheme’s rules. Pension funds may find that crypto isn’t covered in their terms as a new asset class and may need to amend their regulations to clarify their position with agreement from the employer.
- Pension fund management must be in the members’ interests, so there are fiduciary duties a trustee must satisfy before making a decision, including mandatory professional advice according to the Pensions Act 1995.
- Fund policies may prohibit investments, depending on the risk management rules, and any changes to the investment principles require consultation between the trustees and the employer.
- Crypto is not a regulated market, so even if trustees overcome those other obstacles, they will still be limited to a relatively small portfolio proportion, restricting the potential investment value into the crypto market.
Another issue exists around security, whereby a pension trustee with crypto investments must assure the safety of asset ownership, with a question about who should hold the private keys representing the crypto.
As we can see, deciding that you’d like part of your investment fund to be invested in crypto isn’t necessarily straightforward, and there is a lot to assess if your retirement pot is held in a workplace pension fund.
Do Cryptos Have Pension Potential? FAQ
Can I invest in cryptocurrency through a Self-invested personal pension?
Flexibility increases for SIPP owners, who make their own decisions about investing the retirement fund, normally guided by a wealth manager or financial adviser.
You can buy any crypto, including Bitcoin if you want to divert a proportion of a SIPP fund into digital assets.
The downside is that the lack of regulation makes crypto investment through a SIPP a bit of a grey area.
There is no protection if the currency becomes more unpredictable than you’re comfortable with.
While the profits could be attractive, you should conduct thorough research and clearly understand what you stand to lose if your selected crypto drops in value.
Is cryptocurrency a viable retirement investment?
Much depends on when you expect to retire, the size of your pension fund, what type of pension products you have, and your financial expectations.
If you have some years to go before retirement and feel your pension returns are too low, you could potentially decide to invest a small proportion in crypto.
Still, it’s not a product many advisers would recommend to pay an income in retirement.
Pension funds are usually invested in established asset classes such as stocks and bonds, with less volatility.
What proportion of my retirement fund should I invest in crypto?
There’s no correct answer given the high-risk nature of this investment, but wealth managers will usually suggest a maximum portfolio allocation of between one and five per cent.
Any higher, and you stand to whittle away at your retirement fund, and the best option is to regard crypto as a longer-term investment.
Does Crypto Work as a Long-Term Investment?
Although different currencies have wildly varying performances, the market can crash as quickly as prices rise.
Long-term investments usually are more suitable as a retirement strategy because it’s statistically more likely that a crypto asset will appreciate over several years than you are to outperform the rapidly evolving market in a shorter period.
Should I allocate a chunk of my investment portfolio into crypto?
If you have an investment portfolio in addition to your retirement fund, you could consider investing up to the five per cent maximum we mentioned before.
Some investors choose to allocate up to ten per cent of their wealth into crypto, but the risks are considerably high, so you must comprehend the worst-case scenario before making this type of decision.
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