How should I invest my Pension/Investment money? Thank you to AXA Wealth for their contribution to this guide.

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1 How should I invest my Pension/Investment money? Thank you to AXA Wealth for their contribution to this guide.

2 Welcome to making investing simple Investing doesn t have to be complicated In this guide we will explain some basics about investing, how investments work and the type of in-vestments available to you. We know that deciding how to invest your money can be overwhelming and even confusing. We aim to help you build on your investment knowledge so you can feel more confident in making invest-ment decisions. 2 Page

3 Your financial goals There are many factors to consider when choosing a pension. An advisor will be able to help you to evaluate these. How much can you afford to save/invest? Depending on the amount you re saving/investing, some investments may be more suitable than others What would you like to achieve from your savings/investment? Do you have a particular reason to save/invest and is there a specific amount of money you d like to make? You need to be realistic about whether or not your investment is likely to reach its target. How much risk are you prepared to take? Your attitude to risk may well depend on your reason for saving/investing. For example, you may be willing to take a higher degree of risk when saving for a luxury item rather than a necessity. How long are you willing to save/invest for, short or long term? Short term is defined as up to 5 years, whereas a long term saving/investing is considered to be for 10 years or more. If you re saving/investing for a forthcoming event, such as school or university fees, you may prefer less risky saving/investing methods, as over the short term you would have less time to make your money back if your savings were to drop in value. If you are planning for retirement you may be looking at years and therefore may prefer riskier investments. We would always recommend that you discuss your circumstances with a financial adviser: but it s often helpful to think about your financial goals. 3 Page

4 There are many different risks that could affect your investment. Market risk: changes in the bond, equities, property and more money markets could cause you pension to fall in value. Business risk: circumstances affecting a particular company or industry might result in a reduction in the expected investment return. Interest rate risk: a change in the interest rate could have a negative impact on your pension. Each type of pension is affected by rises and falls in interest rates in different ways. Inflation risk: the real value of a pension can fall if inflation rates rise higher than the return being received from it. Exchange rate risk: the value of overseas pensions can be volatile purely due to exchange rate charges. Liquidity risk: a pension may be difficult to sell or cash in. This could result in delays in cashing in your pension or switching funds. What does risk mean to you? It s likely that your attitude to risk will be closely linked to your financial goals. When assessing the level of risk you are prepared to take, you may wish to consider: Your personal financial situation. How much risk can you afford to take? Your pension goals? The level of potential return you would like from your investment and whether you are happy with the level of risk needed to get there? Usually the greater the potential wish the greater the potential reward. Your timescale our attitude towards risk may depends on how long you wish to invest for. Your financial deadline as pensions can go up and down in value, you should remember that at the time your pension needs to be cashed in its value could be at a low point. Some investors like to move their pensions into less risky assets as their financial deadline drops. In any circumstance you should be aware the value of your pension and any income provided by it can go down as well as up in value and is not guaranteed. This means you could get back less than you invest. 4 Page

5 How do investments work? The process of how your money is invested is similar with many investments. Here we explain how an investment may be structured. 1. Product When you invest, it will often be through a financial product, such as a pension or an ISA. The first step is to decide with your financial advisor which product is most suitable for you. Each product has different rules that determine how your money is invested and what you re allowed to do with it. The type of product you choose will be determined by: Flexibility For example how often you can withdraw your money and whether you can make any additional payments into the product regularly or as a lump sum. Charges Associated with your investment The legal rules including any tax implications there may be. Any restrictions there are on the product for example a minimum policyholder age and how much money you re allowed to invest. 2. Fund A fund is a pool of investors money which is often looked after by a fund manager who decides where to invest the money Some products will offer you a choice of funds, so the next step is to determine which suit your investment needs and attitude to risk. Funds are managed either internally, by a fund manager employed by the company you take out your investment with, or externally by an investment company, who employee their own manager. Because a fund is made up of investors money, by law fund managers have to inform customers about how they aim to run the fund and where their money will be invested. You should take this into consideration when selecting your funds. There are many different types of funds for you to choose from, for example: Funds that invest in certain countries or regions of the world. Funds that invest in specific types of companies and industries. Funds that invest in commodities such as gold and precious metals. Balanced funds which invest in a mixture of different areas. 5 Page

6 3. Asset classes An asset Is another name for an investment hold within a fund. Each asset has different characteristics and levels of risk. There are four main asset classes : Money market Bonds Equities Property Choosing the most appropriate asset classes for you will depend on your financial objectives, how long you wish to invest for and your attitude to risk. To help you with your decision, we take a closer look at the four asset classes over the next few pages. 6 Page

7 Money Market These funds place investors money with banks and building societies, as well as a mixture of financial investments. Money market investments are sometimes known as near cash and can include Certificates of Deposit, Floating Rate Notes and Treasury Bills. The risk and return characteristics of these are expected to be broadly similar to cash. Unlike money on deposit, these assets can fall in value, possibly below the amount invested. The main advantage of investing in a money market fund rather than putting your money directly in the bank is that the fund manager aims to negotiate good rates of interest by pooling investors money. By spreading investments across a number of banks and financial institutions, the fund manager is looking to reduce the impact of the loss in the event that a bank or financial institution becomes insolvent and fails to repay the investment. Please note that the money in a bank has ease of access to the monies that an investment into a fund may not be able to match. Money Market funds are perceived to be lower risk and therefore may help lower the overall risk of your investment portfolio. However, the value can fall as well as rise and is not guaranteed which means you could get back less than you invest. Usually Money Market fund the manager can buy and sell investments fairly easily. This means it s normally easy for an investor to transfer their money in and out of the fund. Some investors therefore use Money Market funds as a holding area, moving money to and from other assets in their portfolio when needed. Although Money Market investments tend to be much less volatile than other investments such as equities, there is a drawback that the interest paid by the borrower can be lower than the rate of inflation and/or the charges for a Money Market fund. This means that the investment may fall in value in real terms. 7 Page

8 Potential advantages Can be lower risk Compared to other assets, Money Market funds are less risky, although there is no guarantee that they will remain this way in the future. Liquidity The fund manager can usually buy and sell assets in a Money Market fund fairly easily so can take advantage of investment opportunities more quickly. Interest rates The fund manager may be able to negotiate better rates of interest than an individual investor would receive on a bank or building society account. Potential disadvantages Modest returns Money Market funds can produce lower returns than other asset classes over the long term. Vulnerable to inflation The amount of return provided by a Money Market fund can struggle to keep pace with inflation, meaning your money could be worth less over time. Changes in interest rate Over the longer term, falling interest rates can negatively affect the performance of Money Market funds. Interest rates earned can be lower than the fund product charges applied. Going bust If a bank or financial institution cannot afford to repay a Money Market investment placed with them, then all or some of its value will be lost. 8 Page

9 Bonds A bond is a loan to a company, government or local authority. Some funds invest all or a proportion of investors money in bonds. Bonds are issued by governments or companies in order to raise money. In exchange for the loan, the investor is paid either a fixed-interest rate (expressed as a percentage) or, an index-linked rate linked to the rate of inflation. The two main types of bond are known as: And: Gilts, which are bonds issued by the UK government and traded on the UK stock market Corporate bonds, which are issued by companies and usually carry a higher rate of interest since they don t have the governments support behind them Gilt and bond prices move up and down with market conditions. They are not generally designed for growing your money but they have a nominal (par) value. This is the sum that is returned when the bond matures at the end of its term. 9 Page

10 Potential advantages Reduced volatility Fixed interest funds are sometimes able to offer stable returns as the bonds they invest in aim to pay the fund a fixed rate of return. Cater for different levels of risk Different bond funds offer different levels of risk, from those investing in government backed assets to those investing in government and by large, successful companies are generally thought to be less risky than equity investment. Can provide diversification The performance of bonds isn t necessarily linked to performance of the stock market, so fixed-interest investments can help to balance investors portfolios. Turn to the Diversification section on page 16 to read more about keeping the balance. Potential disadvantages Still carry investment risk Although Fixed-interest funds are thought to be more secure, there are no guarantees and investors may lose some or all of their money. There is always a risk that a bond or even a guilt will be unable to pay either interest due to the fund or the nominal value of the bond at the end of the term. This may affect the fund s performance. Vulnerable to inflation Conventional bond funds can be vulnerable to inflation as the rate of interest paid does not increase over time. Lack of capital growth Although a Fixed-interest fund hopes to deliver a return to investors though receiving interest from the bonds it holds, the capital value of the bonds themselves is unlikely to increase much over time, therefore fund performance can be limited. If market interest rates rise the value of a bond held falls. 10 Page

11 Equity An equity is a share in a company, and for this reason equities are often referred to as shares or stocks. Equity funds can return a profit in two ways: The value of equities can go up as the company becomes more desirable and people are willing to pay a higher price to own a share in it. Companies distribute their profits amongst shareholders by making payments called dividends. The value of an equity and the amount of dividend it pays depends entirely on the fortunes of the company and how investors perceive it. For this reason equities can be volatile and their value can move up and down greatly. There are no guarantees and investors could lose all, or some, of their money. Also, although equities have the potential to make a return on an investment, it can take years for any potential profit to be made. Therefore equities should not be regarded as a way to get rich quick. Equities are as diverse as the different companies and businesses in the world, and are chosen by fund managers based on a number of different factors. Some managers select equities within a specific industry whilst others might select only small companies (referred to as small cap ) or bigger companies (referred to as large cap ). There are potential benefits and pitfalls with most approaches. For example investing in a small company may yield good results as it might grow faster than an established company. However investing in a larger company could be less risky as the business is already up and running. It s up to the fund manager to assess the likelihood of the equity making a profit for the fund and in turn the investors. 11 Page

12 Potential Advantages Choice There is a wide choice of equity investment funds available. You can also invest in a particular country, region or industry if you wish. Beat inflation Equities can help investors portfolios keep pace with the rate of inflation, meaning that over the longer term you could enjoy a real rate of return. However you should remember that the value of your investment can go up and down and you may get back less than you invested. Potential disadvantages Higher risk Some equities are more risky than others, however even those with lower levels of risk offer no guarantees that investors will make a profit and you could even lose money. Dividends are not guaranteed A company does not have to pay dividends to the fund. If it is performing poorly, dividends can be reduced, temporarily suspended or stopped entirely. Volatility Equities can be extremely volatile, meaning the value of your investment can go up and down on a regular basis, making it difficult to plan for specific financial objectives. 12 Page

13 Property Specialist funds investing solely or partly in property. Property investment funds usually invest in commercial rather than residential property, for example office blocks, warehouses or other types of business premises. A property fund manager uses investors money to purchase properties, aiming to deliver a return. This is achieved by leasing out the property and benefitting from any increase in value. Its important to recognise that the commercial property market can perform quite differently to the residential property market. For example, if the value of residential property is falling it doesn t necessarily mean that commercial property will follow the same trend. Because the commercial property market isn t directly correlated to how other assets (like Money Markets and Equities) are performing, property funds can help to balance an investment portfolio. This is only beneficial however, if you don t already have a substantial proportion of your investments already in property. 13 Page

14 Potential Advantages Generating returns Commercial property can provide an investment return as the fund holding the property can benefit from a regular income (the rent). The value of the property can also increase over time, although this is not a guarantee as the value can fall as well as rise. A physical asset Investors can often access details on the properties which have been purchased by the fund, helping your investment feel more tangible. Participation in the property market Property funds enable investors to participate in the property market without the time, commitment, expertise and expense required to buy and let your own property. Potential disadvantages Time constraints Property takes far longer to buy, market and sell than traditional shares. The difficulty in trading property can inhibit the performance of property funds as the manager may not be able to take advantage of investment opportunities quickly enough. This is also known as liquidity risk. This could result in delays in cashing your investment or switching funds Additional costs There are significant costs involved with buying and maintaining a property and this could impact on the profit made by a property fund. There can also be gaps in the rental income received by the fund when properties tenancies are interrupted Market fluctuations The value of properties and the amount of income they receive can go up and down, meaning the value of your investment in a property fund can also go up and down. Investors should remember that there are no guarantees you could lose past or all of your investment. Also, the value of a property is a matter of a valuer s opinion and not fact, therefore the funds assets are only worth as much as somebody is willing to pay for them. 14 Page

15 Diversification Diversification is simply about not putting all your eggs in one basket. In investments terms this means holding a wide range of investments in order to limit your dependence on any one asset class. The four asset classes detailed do not usually respond in the same way to changing economic conditions. The aim of diversification is to spread your investments across different asset classes so that potential losses in one asset class could be offset by potential gains in another. There is, however, no guarantee that this strategy will work all the time as the effect of changing economic conditions is complex and the performance of one asset class can impact on another. Within an asset class, you may be able to diversify your portfolio further. For example, when investing in equities, selecting a variety of different industries may help to balance your portfolio as different types of companies may perform at different times. A straightforward example to demonstrate this would be that when the weathers goo, an ice cream company would probably enjoy good profits; however during periods of bad weather, an umbrella manufacturer would probably be more successful. Funds can invest in a single asset class or a combination of asset classes. A major advantage of investing in a fund, rather than purchasing individual shares, is that you can usually diversify your investment more easily than you could as an individual investor. This process requires careful analysis and investors should always take appropriate, qualified advice before taking any action. Nothing in this paper should be construed as advice or a recommendation to take any action. 15 Page

16 What to do next Need advice on what to do next? We hope you have found our guide to investing helpful. For specific advice on your situation please speak to your financial adviser. They will be able to help you work out which investment is best for you and provide you with a suitable recommendation. If you don t already have an adviser, please visit You can also give our advice centre a call for free on , or drop us an at support@increaseyourpension.co.uk Increase Your Pension is owned by Get Financial Advice. Get Financial Advice is a trading name of Penguin Wealth LLP.