Everyone has heard of cryptocurrency, often hailed as a get-rich-quick investment opportunity in a hyper-modernized market; but is crypto suitable as a retirement fund?
While some investors have made incredible returns on crypto trades, the challenge is that it is a fast-paced world that is difficult to predict moves with accuracy.
While the potential is great, the risk is just as high, so you should seek independent financial advice if you are considering investing part of your retirement fund in crypto.
Crypto Investment Risks
Crypto investments have exploded, with many currencies and brokerage platforms available with low investment limits.
Many investors are lured by astronomical returns that blow conventional pension plans.
the Financial Conduct Authority (FCA) warned that consumers may not appreciate the scale of their risk, and 59% have invested so much that they will face significant problems if their investment fails.
Repos are inherently low risk, investing in safe markets and assets that offer stable and progressive returns with a much lower potential to incur a loss.
Retirement investments for higher returns
We’d all love to stop working in style and have a comfortable financial cushion for retirement, but choosing the right investment product is key.
Crypto may look like a solution, but it’s all about balance:
- Saving money in a bank is safe, but your interest income will likely be minimal, even with recent interest rate hikes.
- Investing in a company listed on the FTSE 100 involves certain risks, but you benefit from the assurance of regulatory compliance and can carry out thorough research.
- Buying crypto like Bitcoin or Dogecoin could earn you a much higher profit, but the price fluctuates daily and the bet is almost impossible to quantify.
Most financial advisors will recommend long-term retirement investments, with the potential to recoup short-term losses and enjoy compound interest returns if you continually reinvest.
A diversified portfolio means you can incorporate some higher risk items, but have other assets offset with greater stability; it’s never a good idea to put your entire retirement pot in crypto.
Why You Should Diversify Retirement Investments
The focus may be on crypto, but countless traditional investments carry substantial risks:
- Property may seem like a stable option, but you could lose significant value if the market stumbles.
- Emerging market equity funds are unreliable, although potentially successful.
- Commodities can be volatile, from precious metals to industrial materials and consumables such as coffee.
- Shares in the Alternative Investment Market (AIM) are regulated, but to a lesser extent than companies listed on the London Stock Exchange, and carry 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 technologies – including hydroelectricity, hydrogen batteries and AI – are popular but equally risky.
This range of high-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 big losses if something goes wrong.
Your age is also a factor. For example, if you’re over 30 before you retire, you might be comfortable with a higher exposure position than if you were to grow your fund to fund your retirement over the next decade.
Assessing Workplace Pension Returns
So many people get into crypto because some self-listing repos offer tiny returns that don’t seem worthwhile.
Auto-enrollment is beneficial, providing a growing number of workers with private retirement savings. A typical investment split is approximately:
- Sixty percent in company stock and high-risk assets.
- Forty percent in low-risk cash or government bonds.
Investors with leeway should consider whether this combination fits their goals rather than assuming that the default investment structure matches their retirement aspirations.
For example, a young investor could make better profits by investing his pension in stocks.
Before making important financial decisions, investors should consider:
- The level of risk they are comfortable with.
- How well they understand the nature of a potential investment product.
- What safeguards are in place to protect their assets should something go wrong?
- If the investment products they have chosen are subject to regulation.
- The value of independent financial advice.
Repos are longer-term investments, so it’s often possible to alter your investment allocations to improve your chances of a higher return – but the extreme risk of crypto volatility isn’t for everything. the world.
Attitude of workplace pension trustees towards crypto investments
A pension fund is managed by the administrators of the plan, who decide whether to invest part of the portfolio in crypto – hedging inherent risks such as inflation and opening up the possibility of higher returns.
The difficulty here is that a trustee will not take this decision lightly, given the legal requirements.
- Trustees have different levels of investment power, determined by plan rules. Pension funds may find that crypto is not covered in their terms as a new asset class and may need to change their regulations to clarify their position with employer agreement.
- The management of the pension fund must be in the interests of the members, therefore there are fiduciary duties which a fiduciary must satisfy before making a decision, including professional advice which is compulsory according to the Pensions Act 1995.
- Fund policies may prohibit investments, depending on risk management rules, and any change in investment principles requires consultation between the trustees and the employer.
- Crypto is not a regulated market, so even if trustees overcome these other hurdles, they will still be limited to a relatively small portfolio proportion, limiting potential investment value in the crypto market.
Another issue concerns security, whereby a pension trustee with crypto investments must provide security of asset ownership, with a question of who should hold the private keys representing the crypto.
As we can see, deciding that you want a portion of your investment fund to be invested in crypto isn’t necessarily straightforward, and there’s a lot to assess if your retirement pool is held in a crypto fund. workplace pension.
Do Cryptos Have Retirement Potential? FAQs
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 advisor.
You can buy any crypto, including Bitcoin if you want to divert part of a SIPP fund to digital assets.
The downside is that the lack of regulation makes crypto investing through a SIPP a gray area.
There is no protection if the currency becomes more unpredictable than you are comfortable with.
Although the profits can be attractive, you should do thorough research and clearly understand what you stand to lose if the value of your selected crypto drops.
Is Cryptocurrency a Viable Retirement Investment?
It all depends on when you plan to retire, the size of your retirement fund, the type of retirement products you have and your financial expectations.
If you have a few years left before retirement and you feel that your retirement returns are too low, you could potentially decide to invest a small proportion in crypto.
Yet it’s not a product that many advisors would recommend for providing retirement income.
Pension funds are typically invested in established asset classes such as stocks and bonds, with less volatility.
How much of my retirement fund should I invest in crypto?
There is no correct answer given the high-risk nature of this investment, but wealth managers generally suggest a maximum portfolio allocation of between 1-5%.
Higher, and you’re about to shrink your retirement fund, and the best option is to consider crypto as a longer-term investment.
Does crypto work as a long-term investment?
Although different currencies have extremely variable performance, the market can crash just as quickly as prices rise.
Long-term investments are generally better suited as a retirement strategy, as a crypto asset is statistically more likely to appreciate over several years than you are to outperform the fast-moving market over a shorter period.
Should I allocate part of my investment portfolio to crypto?
If you have an investment portfolio in addition to your retirement fund, you might consider investing up to the 5% maximum mentioned above.
Some investors choose to allocate up to 10% of their wealth to crypto, but the risks are considerably high, so you need to understand the worst-case scenario before making this type of decision.
Below is a list of related articles that may be of interest to you.