The key determinants of how much you will have in your pension pot by the time you retire are:
- How much you and your employer contribute to your pension
- How long you save for
- How well the funds you invest in perform
- Charges taken from your funds
You can make decisions about how much you save and for how long quite easily, but how to choose where your pension contributions are invested is often a decision that people are ill equipped to make. Most people are not taught anything about ‘investing’ and therefore have no idea about what investment funds are and how to choose which ones to invest in. So I’m going to spend my next few blogs trying to explain investments and investment funds.
Most people put their savings in their bank or building society. Its in cash and they can take out when they want it. If you’re lucky you may receive interest on the cash. The interest rate may be 1.5% – 2% at the moment. Because rates are so low you may want to take a bit more risk. Instead of saving into a cash account you could ‘invest’ that cash. Investments are usually longer-term savings and possibly less easily accessible, but not always. Possible investments would usually fall into the categories of property, bonds, or shares.
So what are Bonds?
- Bonds are loans, or IOUs
- You loan your money to a company, a city, the government for a certain period of time – and they promise to pay you back in full
- In return they pay you with regular interest payments
- Treasurys are issued by the U.S. government and are considered the safest bonds
- Bonds are regarded as safer than shares, with their steady stream of income and the fact that they don’t tend to rise and fall in value by big amounts.
Over the very long-term Bonds have given investors a return of 1.5% – 2% per annum.
What are Shares?
- A share is simply a divided-up unit of the value of a company
- If a company is worth £100 million, and there are 50 million shares in issue, then each share is worth £2
- As the overall value of the company fluctuates so does the share price
- However, share prices also rise or fall on the expectation of future profits
- They anticipate how well a company will do in future
- Share prices can therefore be quite ‘volatile’ – there can be big rises or falls in share prices
Over the very long term shares have given investors a 5%pa return on their investment.
That’s probably enough for now, so more on investing next time.