Investing basics

Cash is a short-term deposit - similar to a bank building society account. Cash carries the lowest risk and can be 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, 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. Money market securities are loans usually issued by banks or governments (i.e. the borrowers) to the buyer (i.e. the lender) for a predefined short-term period. The buyer receives interest and the return of the original investment at the end of the term.

Benefits of cash funds:

• Low level of investment risk.
• Diversification against higher-risk investments.

Some things to consider:

• Cash and money market instruments are lower risk investments aimed at investment returns.
• Although these are the least risky of the asset types, cash can still fall in value over the long term due to the effects of inflation and charges/fees if exposure is obtained through funds or other products.  

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 risks than equity funds, although this is not always the case.
• More potential for growth than cash funds.
• Diversification against other types of investment.

Some things to consider:

• Bond investments still carry risk but are traditionally lower risk than equities and more risky than cash and money market instruments. The level of bond investment risk can be higher in volatile markets, during periods of unpredictable and sometimes sharp price and interest rate movements. This means the value of your investments can fall in value dramatically during those periods.
• 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, although this is not always the case.
• 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 as offices, factories, warehouses and retail space, rather than 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.