Pension Funds
Most pension schemes will invest your money in a default 'Fund'. Essentially a Fund is a collection of shares that are bought by a fund manager. The default funds will usually be low cost and balanced appropriately for long term investment. Some will also automatically shift to less risky funds as you approach a defined retirement age. You may also have the option to select your own funds which may be something you want to do if you plan on retiring earlier than the default retirement age for your scheme. However, for this you would need to have an understanding of the different fund types and the different risk levels. This article isn't intended to be an exhaustive tutorial on fund selection, there are other places that you can gain better insight, for example via Hargreaves Lansdown who are one of the UK's largest pension management companies. Their website contains a wealth of information and you can access it through the following link - Hargreaves Lansdown.
I will offer the following top line information only to help you get started on your fund journey:
1) Funds often consist of either a selection of company shares (equities) or company loans (bonds), or sometimes a mixture. Equities are likely to grow more than bonds in the long term but tend to be more volatile in the short term. Bonds tend to be less volatile, show steady growth over time, but will not grow as much as equities in the long term. Equities are seen as 'riskier' than bonds. This is important as the level of risk you want to accept can dictate how much you invest in each type of fund. As a rule of thumb, if you are a long way from retirement you are likely to want to have most of your investments in equities to maximise your growth. As you approach retirement, you may want to increase the percentage you allocate to bonds which may be regarded as 'safer'.
2) You will also come across funds that are either 'Accumulation' funds or 'Income' funds. With accumulation funds, any money earned from them, through share dividends for example, is automatically used to buy more units of the fund. When you are looking at long term growth, this strategy makes sense. Income funds however, pay out any money earned. This may be useful once you have retired and form the basis of a 'Natural Yield' Strategy that was covered earlier in this article.
3) Funds can also be either actively managed or passively follow an index, such as the FTSE. Passive funds are often called 'Tracker' funds as they passively 'track' the performance of the index that they are following. This lower level of management means that Tracker funds are often much cheaper to manage and this cost saving is passed on to us as investors. Alternatively, actively managed funds are run by fund managers who actively seek to beat the normal stock market index. Some managers do this well, others less so. Many investors believe that sticking with a good index tracker fund is the best option as it's cheaper and often does just as well as an actively managed fund. At the end of the day, you have to make the decision on which is right for you based on what you want to achieve. For example, it may make sense to have an actively managed fund if the charges are not too great and the dividend income it produces is higher than an equivalent tracker fund.
As a foot note, the funds you can have in a Stocks and Shares ISA, are exactly the same as the funds you can hold in a pension and follow the same broad rules as outlined above. I mention that as a Stocks and Shares ISA is also a useful investment to help fund retirement. You can find out further information on the Stocks and Shares ISA page under Passive Income
I will offer the following top line information only to help you get started on your fund journey:
1) Funds often consist of either a selection of company shares (equities) or company loans (bonds), or sometimes a mixture. Equities are likely to grow more than bonds in the long term but tend to be more volatile in the short term. Bonds tend to be less volatile, show steady growth over time, but will not grow as much as equities in the long term. Equities are seen as 'riskier' than bonds. This is important as the level of risk you want to accept can dictate how much you invest in each type of fund. As a rule of thumb, if you are a long way from retirement you are likely to want to have most of your investments in equities to maximise your growth. As you approach retirement, you may want to increase the percentage you allocate to bonds which may be regarded as 'safer'.
2) You will also come across funds that are either 'Accumulation' funds or 'Income' funds. With accumulation funds, any money earned from them, through share dividends for example, is automatically used to buy more units of the fund. When you are looking at long term growth, this strategy makes sense. Income funds however, pay out any money earned. This may be useful once you have retired and form the basis of a 'Natural Yield' Strategy that was covered earlier in this article.
3) Funds can also be either actively managed or passively follow an index, such as the FTSE. Passive funds are often called 'Tracker' funds as they passively 'track' the performance of the index that they are following. This lower level of management means that Tracker funds are often much cheaper to manage and this cost saving is passed on to us as investors. Alternatively, actively managed funds are run by fund managers who actively seek to beat the normal stock market index. Some managers do this well, others less so. Many investors believe that sticking with a good index tracker fund is the best option as it's cheaper and often does just as well as an actively managed fund. At the end of the day, you have to make the decision on which is right for you based on what you want to achieve. For example, it may make sense to have an actively managed fund if the charges are not too great and the dividend income it produces is higher than an equivalent tracker fund.
As a foot note, the funds you can have in a Stocks and Shares ISA, are exactly the same as the funds you can hold in a pension and follow the same broad rules as outlined above. I mention that as a Stocks and Shares ISA is also a useful investment to help fund retirement. You can find out further information on the Stocks and Shares ISA page under Passive Income