How are pensions invested?

There are multiple ways in which your pension’s designed to grow over time. Like other investment types, pension plans are made up of a range of different asset classes. The main asset classes are: bonds, cash, commodities, company shares, and property. Broadly speaking, investing is simply the process of buying assets with the aim of generating positive returns over time.

Pensions are a type of tax-efficient savings products designed for long-term growth to provide you with a retirement income. Your pension will likely contain a combination of assets, but the weighting may change depending on how close to retirement you are. This strategy, known as diversification, is designed to spread the level of risk and reward as each asset class performs differently.

What do pensions invest in?

Most pension funds contain a mixture of different types of investments all batched together in a plan, for easy and cost-effective investing. Here’s a breakdown of what these asset classes are:

Fixed income investments

What’s a bond?

Bonds are basically loans given by investors to companies. In exchange for their funding, the company usually pays investors fixed interest on the bond amount before repaying it in full on a pre-agreed date. Bonds are also known as ‘fixed income investments’. With bonds the interest rates offered, and the loan term, can differ from product to product. Bonds thrive on market stability as they aim to provide moderate growth for investors.

Historically, bonds have been widely regarded as ‘safe assets‘. There are two types of bonds: corporate and government. Corporate bonds usually pay investors a higher interest rate, while government bonds are usually considered more stable. Bonds are often included in pension plans to balance portfolios from the volatility of higher risk investments, like company shares.

Equity investments

What are stocks and shares?

Stocks and shares are the same thing, and essentially refer to slices of ownership in a company. Companies can issue shares and are held responsible by shareholders to act ethically and create increased value for them. Shares, or stocks, are known as equity investments. Putting your pension under a microscope, you’ll see that you probably own a miniscule percentage of many of the world’s largest and most successful companies, like Apple and Microsoft.

Shares are portions of company ownership where the company’s value, divided by the number of shares in issue, forms the individual share price - which fluctuates in value over time. The price can fluctuate according to current market conditions, historic performance and potential growth opportunity. Your equity portion of your pension is known as your holdings. The ‘top’ holdings in your pension refer to the companies you have the largest investment in.

Other investments

What are commodities?

Commodities are global resources that are necessary for everyday life, and their value is influenced by supply and demand. As commodities encompass many individual products, they’re often grouped into these three categories:

  1. Agriculture (cocoa, coffee, grains, meats, soybeans)
  2. Energy (crude oil, diesel fuel, electricity, gasoline, natural gas)
  3. Metals (copper, gold, iron, silver, steel).

Factors like inflation, trade deals, and even weather can impact the value of these goods. Commodities are raw materials used in the production of many staple goods. Their fluctuations in value have a knock-on effect on businesses and the cost of living.


How are pensions diversified?

Financial products like pensions are examples of tax-efficient ‘wrapper accounts‘ (a pool of different investments managed together). When you look at your pension, you’ll see your wrapper balance which is the combined value of all your individual investments. With a pension you don’t have to research, find, and invest in lots of individual asset classes to achieve diversification, as many pension providers offer funds that contain a mixture of asset classes.

Most pension funds often contain a mixture of different types of investments. One of the most well known tips for managing your money is the ‘not all your eggs in one basket’ strategy, also known as diversification. Spreading your investments - whether that’s geographically, across industries, or across asset classes - means if there’s a loss in one of these areas, it won’t severely impact your overall investment, reducing the risk.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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