Did you know that you’re already an investor? It might sound like an unusual question, but our Global Retirement Survey discovered that over 40% of people we asked didn’t realise that their retirement savings are invested1.
When you join your workplace pension, your contributions are automatically invested for you in the plan’s default option. As a member and thereby an investor, you can change this and choose your own investment funds from the range your plan offers. Or you can stay in the default option if you prefer to let experts make the investment decisions for you.
What is an investment fund?
A fund pools money from lots of investors. The fund manager then spreads that money across a variety of investments.
You can choose from a range of funds available through the FEPP managed by Fidelity and other leading fund managers. These focus on different sectors, regions and types of investment. Whatever funds you choose, you benefit from the investment expertise and management of a professional fund management team.
Learn about investing
Type of investment asset classes
The different types of investments are often referred to as ‘asset classes’ – some common examples include company shares (or ‘equities’), bonds, property and cash.
The performance of different asset classes will naturally vary over time. As they all have their own unique characteristics, wider market conditions and world events will affect them differently. That’s why it’s important to spread your money over a range of investments – it enables you to help reduce the risk of your pension savings falling in value if one asset class is out of favour. Investors usually call this strategy ‘diversification’.
Diversification is essentially the principle of spreading your risk.
If you spread out or ‘diversify’ your pension savings across several different investments, in line with your retirement goals and risk tolerance, you’ll be in a better position to withstand any potential losses from a single asset class.
Risk and return
The relationship between risk and return is one of the most important aspects of investment. For you as an investor, risk relates to the possibility that you may not achieve your retirement goals or that you get back less than you invest.
Generally speaking, the greater the risk you are prepared to tolerate, the more potential there is for your investments to grow. There is no guarantee that you will get higher returns by accepting more risk, but taking less risk with your investments is likely to mean you see lower returns.
The risk-return spectrum
This image shows a spectrum from assets with lower risk and less growth potential, towards assets carrying higher risk, with the potential for higher growth.
Risk-return and your workplace pension
When it comes to your workplace pension, you may choose to invest in the plan’s default investment option, where risk-return is already considered. Or you may decide to choose your own investment options. In this case, your tolerance for risk will help you decide which assets to invest in.
Investing when your retirement is some way off
Investing in assets with a higher potential for growth but greater risk may be an idea worth considering. The long-term effects of compound growth may also work in your favour.
Investing when you are nearing retirement
As you get closer to retirement, you may want to lower the level of risk. This will help to reduce the possibility of your pension savings falling in value, just when you need to start using them.
More about the main asset classes
Cash carries the lowest risk and can be a useful as it provides good diversification to riskier investments. You may decide to hold some cash in the few years before you want to access your pension savings to help preserve their value.
Within your pension plan, you can hold cash through a cash fund. This is an investment, not a savings account, and it will invest in short-term deposits and bonds.
Benefits of cash funds:
- Low level of investment risk.
- Diversification against higher-risk investments.
Some things to consider:
- Cash funds can fall in value, so you may get back less than you invest.
- The potential for capital growth is limited.
- Inflation can reduce the real value of your money.
Bonds are loans, where the investor lends money to a company or government in return for a fixed rate of interest over a set period and the repayment of the principal at the end of that period. You may hear bonds referred to as ‘fixed income’ investments. Within your pension, you can hold bonds through a bond fund.
A bond fund will hold a range of bonds and perhaps some other types of debt. Many funds concentrate on specific types of bonds – for example, ‘gilts’ issued by the UK government or bonds issued by companies with good credit ratings.
You may think about moving your money into bond funds as you get closer to the time when you want to access your pension to help preserve the value of your savings.
Benefits of bond funds:
- Lower risk than equity funds.
- More potential for growth than cash funds.
- Diversification against other types of investment.
Some things to consider:
- While considered lower risk, bond funds can go down in value, so you may get back less than you invest.
- Bond funds typically offer lower growth potential than equity funds.
When you buy a share in a company, you become one of its owners – you have ‘equity’ in it. Your investment return depends on the success or failure of the company. If its value goes up, so will the value of your shares. In addition, the company may pay its shareholders an income, known as a ‘dividend’. Within your pension, you can hold equities through an equity fund.
An equity fund buys a range of company shares. Some funds focus on a particular region, such as the UK, US or Europe, while others concentrate on companies in a specific size bracket.
You may want to invest in an equity fund if you are aiming for long-term growth. You must be willing to accept that the value of your investments could go down as well as up, particularly in the short term.
Benefits of equity funds:
- Greater potential for long-term growth than bond or cash funds.
- Opportunities for diversification, thanks to variety of markets, regions and sectors.
Some things to consider:
- Equities involve more risk than other types of investment, so the value of your investment may be volatile, particularly in the short term.
- Equity prices can go down as well as up, so you may get back less than you invest.
If you own your own home or have a buy-to-let, you are already a property investor. You can also invest in property through your pension with a property fund.
Most property funds buy commercial buildings, such offices, factories, warehouses and retail space, rather than the residential property, and they may benefit from being able to invest in large projects that would be out of the reach of most individuals. A fund should also receive rents from the properties it owns.
You might think about investing in a property fund if you are interested in long-term growth, and there is a long time until you need to access the money in your pension.
Benefits of property funds:
- Opportunity to invest in properties that you could not afford on your own.
- Property ownership without the responsibilities of maintenance and letting.
- Potential for long-term growth if property prices rise and rents are paid.
- Diversification potential, as property markets can behave differently from other types of investment.
Some things to consider:
- Property prices may fall, or there may be problems with rent payments, in which case you could get back less than you invest.
- It can take a long time to sell properties, so trading in property funds can be suspended if lots of investors want to redeem their holdings. This could lead to a delay if you want to withdraw your money from a property fund.
- If you already own property, investing in a property fund through your pension could increase your overall financial exposure to the property market.
Active and passive – different styles of fund management
Whichever asset classes you are thinking of investing in, it is likely that you will have a choice of active and passive funds:
- With an active fund, there is a manager who decides which investments funds are invested in. They will use their experience and skill to choose the investments. The fund charges are likely to be higher than those on a passive fund, in order to pay for the fund manager and the research and analysis they have access to.
- A passive fund simply attempts to match the performance of a stock market index, such as the EuroStoxx 50, or the Dow Jones in the US. The allocation of investments in the fund is based on the investments that make up the index. There is less human decision-making than there is with an active fund, so charges are typically lower.
It is a good idea to review where your pensions savings are invested on a regular basis to make sure that they are right for your retirement goals.
None of the information above is a personal recommendation for any particular investment and it’s important to remember that the value of investments can go down as well as up, so you may get back less than you invest.
If you are unsure about whether your choice of funds are suitable for your circumstances, or you need advice on any of the options available to you, we recommend that you speak to a regulated financial adviser.
Want to review your investments?
Log in to PlanViewer to see where your workplace pension is invested.
Want to make changes to your investments?
Learn more about how to self-select your own investments.