An annuity gives you a guaranteed income for life. You usually buy it when you retire using the money you’ve built up in your pension plan.
An asset class is a group of assets with similar characteristics that behave in similar ways. There are four main asset classes - shares, cash, bonds and property - each with different pros and cons. Investment funds invest in one or more asset classes.
This is a government initiative to automatically enrol millions of employees into workplace pension schemes. If you’re enrolled, a slice of your pay packet will automatically go into a pension plan for you - and your employer will pay into it, too.
This is a regular payment you can get from the government when you reach state pension age. To get it, you must have paid or been credited with sufficient National Insurance contributions. You might be entitled to other state benefits when you reach retirement age. Visit gov.uk to find out more.
Bonds are a type of asset. They are loans to UK and international companies. The company pays interest on the loan and promises to repay the debt at a certain point in time. They are seen as riskier investments than gilts, which are loans to the UK government. This is because companies are more likely to fail to repay the loan than the UK government. However, they often offer a higher rate of return to balance out this higher risk.
Cash and cash alternatives are a type of asset. These include:
Equities are a type of asset. Equities are shares in companies listed on stock exchanges around the world. As shares can rise and fall in value very easily, equities are riskier than some other investments. However, they usually offer the greatest chance of higher returns over the long term.
Gilts are a type of asset. They are loans to the UK government (also known as government bonds). The government pays interest on the loan and promises to repay the debt at a certain point in the future. The value of gilts will rise and fall.
An investment company pools the money of individual investors and invests it in a range of assets (eg shares and property) to achieve certain aims, such as investment growth. Well-known investment companies include Artemis, BlackRock and Invesco.
An investment fund invests in a range of assets (such as shares, cash equivalents, bonds and property) with the aim of achieving certain objectives, such as investment growth. When you invest in an investment fund, your money is pooled with that of other investors’. This gives you access to greater management expertise and lower fees than you’d usually be able to get on your own.
Funds are a way for you to pool your money with other investors so you can:
You can usually choose which funds to put your money in and change the funds you invest in. There are lots of different types of fund and many options to choose from. If you're not sure which one(s) to pick, we strongly suggest that you talk to a financial adviser. They will be able to assess your personal situation and make recommendations for you.
Different funds carry different levels of risk. A low risk fund might aim for steady growth over a long period of time with a low risk of losing money but there's the possibility that it won't keep up with inflation. A high risk fund will usually aim for higher long-term growth, but there’s a greater risk of losing money.
The types of assets a fund invests in are important factors in the returns you're likely to get and the amount of risk that you're taking. A high risk fund might invest in shares of companies in either the UK or overseas. This gives the fund the potential to provide good long-term returns, but also means it’s likely to see large ups and downs in value. A low risk fund might invest in government bonds, which normally offer lower returns but should be more secure.
A pension plan helps you prepare for your retirement. You pay into your pension plan during your working life. Your employer may also pay into your pension plan. The government gives you tax relief on your payments, effectively paying into your pension plan too. Your pension plan provider pools these payments and invests them to build up a pot of money for when the time comes to retire. When you are ready to take your retirement benefits, you will have various options. We will write to you in advance to let you know what your options are. You can also find out about them now by visiting our Savings and Retirement section.
When we refer to a pension pot, we mean the total amount of money you have in your pension plan at that moment in time.
This is the total of all your salary, fees and other payments paid to you by your employer. It also includes any other payment or benefit defined as pensionable in your contract of employment. This is usually your normal salary or wages, plus any shift allowance, bonuses, honoraria, contractual overtime, statutory sick pay, maternity pay, paternity pay, and adoption pay.
(Honoraria means a voluntary payment for services you wouldn’t normally be paid for. You must pay income tax and National Insurance contribution on these payments).
Your pension payments are deducted from your gross pensionable pay.
These funds mainly invest in commercial property, such as major shopping centres and business offices. They may also invest in indirect property investments, including quoted property trusts and unregulated collective investment schemes. The funds may also hold geared investments. Gearing is a process which borrows money to boost the potential capital gains and income due to investors. The return on this extra investment (minus the cost of the borrowing) gives investors an enhanced or geared profit. This can carry a higher degree of risk and the value may fall sharply or suddenly.
The value of all funds can go down as well as up. This means all funds carry the risk that the value could drop below the value of the money originally invested. Typically, the more the value of an investment fund changes, the higher the potential for gains or losses. For every fund, there is a certain amount of risk involved. This is often known as risk/return, so understanding your attitude to risk/return is important.
Risk and return go hand in hand. Low risk investments tend to grow slowly and more steadily than high risk investments.. That means that your returns are likely to be slow and steady too, although there's the possibility that it won't keep up with inflation. High risk investments usually have a much higher risk of failure, but if they work, they could give you a good return on your money.
You need to remember that with both low and high risk investments, the value can move up and down and you may get back less than you put in.
Tax relief is the amount of money the government pays into your pension plan. You get this money because your pension payment is taken from your salary before you pay income tax. Tax relief is currently 20%. This means that for every £1 you pay into your pension, you actually only pay 80p and the government pays the other 20p. If you pay tax at higher rates you can claim your extra tax relief through your self assessment tax return.