Different classes of investment

There are several different types of assets available for you to invest in. It is important that you understand the differences between them because they have different levels of risk and return.


Equities (or company shares)

What are equities?

These are shares in UK or overseas companies. An investor is rewarded for holding a share in two ways:

  • a share typically pays an annual dividend based on how well the company did that year, and
  • the price that you could sell the share for may rise (though it may also fall).

What risk & return can I expect?

In general investors are rewarded for risk. This means that the more risk you are willing to take, the more your savings are expected to grow.

Shares are higher risk than bonds or cash therefore, over the long term, your savings would be expected to grow more than if they were in a bond or cash fund. Share prices can rise and fall quite sharply, so there is no guarantee that you will get back all of the money you put in.

Investing in shares in overseas companies has the added risk of an unfavourable currency movement, which will reduce growth.

With any investment there is no guarantee that long-term growth will be achieved as the value of your savings can go down as well as up.


When is it suitable to invest in shares?

Shares are generally considered to be more suitable if you are at least 5 to 10 years from retirement and can therefore take advantage of the higher expected return but have a long time to retirement so have more time to recover, in case of loss.

You may decide shares are not suitable for you (as when losses arise they can be significant).



What are bonds?  

Bonds are issued by companies or governments as a way of raising money.

Corporate bonds are essentially loans to companies, who promise to repay the money at an agreed time and to pay interest in the meantime. Government bonds (also known as Gilts) are similar, but are loans to the UK Government.


What risk & return can I expect?

There is a risk that the bond issuer is unable to repay the loan and therefore defaults. The higher the risk of default, the higher the interest rate that can be expected on the loan. As companies are seen as more likely to default on payments than the Government, investors are expected to receive a higher return on corporate bonds than Gilts (Government bonds).

Bonds are typically lower risk than shares and therefore, investors can expect to achieve a lower return from a bond fund than from a share fund. However, there is no guarantee that long-term growth will be achieved as the value of your savings can go down as well as up.


When is it suitable to invest in bonds?

The price of an income for life (also known as an annuity) is linked to the price of bonds. Therefore, such investments may be useful close to retirement, if you are trying to minimise any major changes to the amount of pension you can buy when you retire.

Whether you are planning on buying an annuity or not, bonds can be used to reduce the likelihood of a significant loss to your savings.

Multi-asset Funds (also known as Diversified Growth Funds)

What are multi-asset funds? 

These funds invest in a variety of different assets including shares, bonds, property and cash. The fund manager allocates the fund between the different asset classes depending on how he/she expects them to perform and how risky those assets are.


What risk & return can I expect?

These funds try to balance risk and growth by splitting money between different types of assets. This means that all your eggs are not in 1 basket so if 1 asset does poorly your savings are not as effected as if everything had been in that asset class. This also works the other way round, for example if the share market does well, the value of your savings will not increase as much as if all your savings had been in shares.

These funds invest in some high risk assets and some low risk assets, therefore the expected return is between that of shares and bonds.


When is it suitable to invest in multi-asset funds?

Multi-asset funds are generally considered to be suitable at any stage of retirement saving however, given these funds partly invest in higher risk assets, you may want to mix this fund with a lower risk fund when you are 5-10 years from retirement. The multi-asset fund/Diversified Growth Fund will hold cash and bonds from time to time and the allocations will change overtime.


What are cash funds? 

You will be familiar with bank accounts with your bank or building society. In return for depositing an amount with a bank you are paid interest until you wish to reclaim your money. These funds work in a similar way, the fund loans money for short periods in order to achieve a return similar to a bank savings account. However, unlike your bank account, the value can go down as well as up.


What risk & return can I expect?

Cash and deposit funds are normally considered to be low-risk as the amount of the investment is unlikely to decrease. However, in return for this security, the returns that can be expected over the long-term are lower than those expected from shares or bonds and may not keep up with price inflation.


When is it suitable to invest in cash funds?

Cash funds look to protect the value of your savings against large losses but in return for this protection, are expected to grow your savings less than the other funds available in the Plan. Therefore, Cash funds are generally considered to be suitable when you are less than 10 years from retirement and are not considered to be suitable for achieving long-term investment growth