• Home /
• About us /
• Sponsorship /
• Contact us /
• Site map

Building blocks of your pension

Your pension plan may offer you lots of different investment choices, but essentially they come down to three basic ingredients:

• Shares
• Bonds
• Cash & Liquidity

Once you understand how these three building blocks work, you can start to create the right investment strategy. 

Shares – invest in stock market potential

Shares – also known as equities – are issued by companies to raise money to expand their business. To get people to buy their shares, companies offer shareholders a slice of their profits, paid out as an annual dividend. Dividends can vary and are never guaranteed.

Shares can be bought and sold on The stock market. If prospects for a company look good, the share price can rise sharply. But if a company’s fortunes weaken, its share price can fall.

So while share prices can rise rapidly, they can also fall in value. As an investor, you need to ask whether you are willing to accept this risk. 

Bonds – the fixed income choice

Like shares, bonds are issued by companies (and governments) to raise money. But whereas shares don’t guarantee what dividend they’ll pay, bonds tend to pay a fixed income each year. Most bonds also promise to repay capital on a certain future date.

Because bonds are most predictable, they tend to be more stable than shares (although prices can still fall). However, while returns on bonds can be quite steady, they rarely experience the strong growth shares potentially enjoy.

Different kinds of bonds involve different levels of risk. For example, a bond issued by the UK government is likely to be less risky than one issued by a small company, simply because companies can go out of business but governments rarely do.

Cash & Liquidity – the lowest-risk investment choice

Cash can be useful in the run up to retirement as it can help guard against 11th hour market falls in share prices. 

Cash can simply mean deposits, like bank or building society accounts that hold your money and pay interest on it.

Cash can offer peace of mind but it has no growth potential – apart from any interest you may earn. If you hold everything in cash, you might miss out on the opportunity to grow your pension fund and your money might not keep pace with inflation.

As a pension fund option, you may be offered 'cash funds', ‘money market funds’ or ‘liquidity funds’. These funds spread your money across many different deposits, and funds are actively managed, while offering ready access to capital. Although offering a high level of security, these types of funds cannot offer any guarantee that your investment won’t fall in value. 

Creating your pension strategy

By blending shares, bonds and cash together, you can create a portfolio that balances your need for growth with your tolerance for risk.