The basics of investing

The money you pay into your pension plan is invested, which gives it the potential to grow. Read on to learn how investing works, what types of fund there are – and more.

Why invest?

Investing can give you a way of trying to beat the effects of inflation. It gives your money the potential to grow more than it typically would in a savings account – particularly over the long-term. The downside is that investments can fall as well as rise in value, so you can end up getting back less than you paid in.

How investing works

The money paid into your pension plan goes into one or more investment funds (which ones depends on which investment option you’re using).

Every investment fund invests in a range of ‘assets’ (shares, cash, bonds and property, for example), with the aim of achieving certain objectives. Exactly what it invests in can vary quite a lot, as it depends what these objectives are. Some funds aim purely for growth, some to protect the value of your money, and others have different objectives.

You can learn about the objectives of each fund by reading its fund factsheet.

Your money will then stay in this investment fund or funds until:

  • You are ready to take your retirement benefits.
  • You move your money into new funds (or we do it for you, if you’re using an investment option where that’s the case).

What’s investment risk and return?

When it comes to investments, ‘risk’ refers to the possibility of losing money. ‘Return’, on the other hand, is any gain you make on top of what you originally invested.

High-risk investment funds tend to be capable of greater returns than lower risk ones. But there’s more chance you’ll lose money with them. With low-risk funds, there’s less chance of losing money, but they tend to be capable of lower returns than higher risk funds.

More about risk

When you’re thinking about how much risk to take, two things you might want to consider are:

  • your circumstances, and
  • your attitude to risk

Your circumstances

Your circumstances ought to have an effect on how much risk you’re willing to take.

Examples of the factors you should consider are the size of your fund, your other savings and assets, how long you are from retirement, your family needs and your health.

Your attitude to risk

It’s also important to consider your attitude towards investment risk.

Some people are happy to invest in higher risk funds. They’re happy to accept significant fluctuations in the value of their pension pot in exchange for higher growth potential. But other people feel very anxious if their pension pot drops in value, so wouldn’t be comfortable investing in many high risk funds.

The importance of diversification

Whatever risk level you’re happy with, it’s a good idea to spread your investment over a range of asset classes. In this way, you may be able to balance out the effects of poor performance in one area with good performance in another.

It’s also important that the investment option you use is suitable for your circumstances and the amount of risk you’re wiling to accept. And remember that all investments can fall as well as rise in value, so the value of your pension plan may be less than the amount paid in. We strongly recommend talking to a financial adviser when considering changing funds or if you're unsure of how much risk you should take.

What types of investment fund are there?

You can invest your money in several different types of investment fund. Each one has different pros and cons. Read on to find out more.

Please remember that the value of funds can go down as well as up and you may get back less than has been invested.

Cash/Money market

Cash/Money market funds are lower risk investments aimed at giving similar growth to bank/building society interest rates, however, investing in these funds is not the same as saving in a bank or building society account. Although this is the least risky of the asset types, these funds can still fall in value. In the long-term an investment in this type of fund can be eroded due to the effects of fund charges, product charges and inflation. They invest in cash and cash alternatives:

  • Cash means a range of short-term deposits – similar to a bank/building society account.
  • Cash alternatives are money market securities, which are interest generating investments, issued by governments, banks and other major institutions.

Corporate bonds

Corporate bonds are issued by UK and international companies as a way for them to borrow money. 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 UK 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. The highest risk bonds tend to offer the highest potential returns; these are known as high yield bonds.

A corporate bond fund will usually invest in a range of bonds which means you’re spreading the risk in case one company can’t pay back the money it owes.

Interest rate movements have an impact on corporate bond and fund unit prices. So for example, as interest rates rise, bond prices fall. This would affect the value of your investment.

If you need to access your money quickly it is possible that, in extreme market conditions, it could be hard to sell holdings in corporate bond funds. This means there could be a delay in receiving your money.

Distribution (applicable to bonds only)

Distribution funds aim to provide a regular income. They invest in income-generating assets like shares that pay dividends; corporate bonds that pay interest; and commercial (business) property that receives rental income. You receive the income produced by the fund, minus any fund charges. The amount of any income payments can vary and isn’t guaranteed.


Funds where the choice of investments is influenced by social, environmental or other ethical criteria. Some of these funds undertake ethical screening to meet their investment aims. This means they will check companies against certain moral standards before investing in them. Because ethical funds are therefore unable to invest in certain sectors and companies they may be more sensitive to price swings than other funds.

Equities (shares)

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 most other investments. However, they usually offer the greatest chance of higher returns over the long term.

Some funds invest in shares traded only in certain countries, while others invest in companies from all over the world. Others only invest in certain types of company, such as technology companies. Generally, the more specialised the fund is, the higher the risk to your investment.


UK gilts (also known as government bonds) are issued by the UK government as a way for them to borrow money, usually for a fixed term. The government pays interest on the loan. As they are issued by the UK government, they are generally seen as lower risk investments than bonds issued by companies (corporate bonds).

As gilts can be bought and sold on the open market, their value can rise and fall.

Global bonds

Global bond funds invest in bonds issued by companies (corporate bonds) and governments from around the world.

Mixed asset

Mixed asset funds invest in a range of assets such as equities, corporate bonds, gilts, property and cash.

The diversification offered by these funds helps spread the risk to your money. If one type of asset falls in value, another type may offset that reduction in value by performing well. In that way, it’s possible that the overall value of your investment may not fall. On the other hand, because the fund’s investments are spread between different asset types, if one type performs especially well you may miss out on some growth.


These funds invest mainly in commercial property, such as 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. With these, the investment manager borrows money to boost potential growth and income. The manager repays the loan from the returns and uses the remaining returns to increase profits for investors. Geared investments can carry a higher degree of risk than normal investments and can also fall sharply or suddenly in value.

A valuer’s opinion often decides the value of property investments and it may not be possible to sell property investments immediately. That means there could be a delay if you want to move all or part of your investment out of funds investing in property. We may have to delay payments, or transferring or moving your money for up to six months.

If a property fund invests in a collective fund which suspends trading, the property fund may hold more cash than usual until the underlying collective fund begins trading again. This could restrict growth potential as cash investments have less potential for growth than property investments.

Please remember the value of property can go down as well as up and is not guaranteed.


This type of investment covers funds that don’t fit into the other fund types. For example, they may invest in assets such as infrastructure, commodities, derivatives and hedge funds or may be free to invest in any asset type at any time.

Each fund in this group will invest differently, so you should check its fact sheet for the fund objective, risk rating and asset details.


These funds aim to perform in line with a particular stock market index. They are often referred to as passive rather than active managed funds, where the fund manager makes the investment decisions.

Funds can track the index in three main ways and more than one method may be used. The fund can try to:

  • hold the same assets as the index in the same proportions
  • decide on a selection of holdings to still closely mirror the index performance, and/or
  • use derivatives. (Derivatives are a financial contract whose value is based, or derived from, a traditional security or asset (stock, bond or commodity) or a market index.)


This is a special type of mixed asset investment. It shares the profits and losses of a with-profits fund with investors through a system of bonuses. Your payment buys units in a with-profits fund. For most with-profits funds, the price of these units increases with the addition of regular bonuses. We don’t guarantee to add a regular bonus to your investment each year.

You may receive a final bonus when you cash in or switch your investment out of the With-Profit Fund or in the event of your death.

The aim of a with-profits fund is to spread out profits or losses from one year to the next. This is called ‘smoothing’ and is unique to with-profits investments. The effect of smoothing means you’re likely to see a steadier return year on year, rather than watching the value of your investment rise and fall in line with stock market fluctuations.

As a result of smoothing, the investment risk on a with-profits fund is lower than investing directly in the same equities or property.

If you move money out of a with-profits fund at a time when there’s been a large or sustained fall in stock markets or when investment returns are below the level we normally expect, we may have to apply a market value reduction. This would reduce the value of your investment. We apply a market value reduction to make sure all our customers receive their fair share of the returns earned over the period of their investment.

We guarantee we will not apply a market value reduction on your death.

If you’re a pension customer and you keep your money invested in the pension With-Profit Fund until the retirement date you originally chose, in most cases we will not apply a market value reduction. This doesn’t apply:

  • if you started your plan within five years of your chosen retirement date
  • to new one-off investments or increases to regular contributions (other than automatic increases which have already been agreed by us) made within five years of your chosen retirement date
  • to any existing investment moved into the With-Profit Fund within five years of your chosen retirement date
  • to switches out of the With-Profit Fund.

If you move out of the With-Profit Fund before or after your originally selected retirement date, we may apply a market value reduction when you take your benefits.

Please remember that the value of funds can go down as well as up and you may get back less than has been invested.

You can find out more about with-profits funds on our website or contact us on 0800 015 4785 for a copy of our guide. If you are unsure, we recommend you seek financial advice.

What charges will you have to pay?

You have to pay certain charges when you have a pension plan. They’re taken straight from your pension pot, not from your salary. Full details of the charges can be found in the policy documents issued when you join a plan.

Here are the charges you might have to pay and what they’re for:

An annual fund charge

This charge covers the costs of us looking after your pension plan for you. It’s taken as a percentage of the total value of your pension plan.

Additional yearly charge

With certain funds you’ll have to pay an extra charge; this reflects the extra cost of managing these funds. The charge you'll pay will vary depending on the fund you choose.

Performance charges

Some funds in our fund range also include a performance charge. This is a charge that will be taken if the fund meets certain performance targets such as achieving a certain level of growth. If this charge applies it will be taken directly by the fund manager and will be reflected in the value of your units, how these charges are calculated will be detailed on the funds latest factsheet.

Fund manager expense charge (FMEC)

FMECs are additional charges that cover the fund manager’s expenses connected with buying, selling, valuing, owning and maintaining the assets in the funds. This charge is taken into account in the unit price. FMECs may vary from year to year. Please note if your fund has a performance charge it will be shown in the FMEC.

Total additional yearly charge

This is the total sum of the additional yearly charge and any fund manager expense charge (FMEC).

So, how much will this actually work out as?

Let’s say, for example, you’re paying a total of 0.75% in charges each year. In that case, you’d be paying 75 pence for every £100 you had invested. So if you had £50,000 in your pension plan one year, you’d pay £375 in charges.

Charges for advice

If you’ve received advice from a financial adviser, you may have to pay a charge for the cost of their advice. You may have agreed for this charge to be taken directly from your plan.

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Choosing your own funds?

Read through our fund factsheets and performance data before deciding which ones to pick.

Risk/return ratings

The risk/return ratings we give each investment fund - and what they mean.

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Need some advice?

If you’d like a hand deciding where to invest your money, a financial adviser could help.

For more information about getting financial advice, visit our financial advice page.

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