Pension funds and investment risk

Understanding Pension Funds

A fund is a collection of investments with specific strategies or goals in mind. When it comes to pensions, these funds often aim for long-term growth. The idea is simple: by the time you retire, you'll have more money saved up than you initially invested.

At Penny, our pension funds invest globally in company shares as well as loans to governments and companies, known as bonds. But not all funds are created equal. Each has a different level of risk and reward, and this is measured by what's known as a risk rating.

What Is a Risk Rating?

Risk can mean different things to different people. For many, it's the fear of losing the money they invested. Fund values fluctuate with market movements, but they don't all fluctuate the same way. That’s where risk ratings come in. They give you an idea of how much risk you are taking when you invest in one of our funds.

Our funds have risk ratings from 1 (lowest volatility) to 7 (highest volatility). These ratings reflect how likely it is for a fund's value to go up and down over time. They’re calculated using historical performance data and insights from fund managers.

High Risk vs. Low Risk

Higher-risk investments are more likely to see larger fluctuations in value over time. This means they might swing from high to low in value more often. Choosing a lower-risk investment means your money is likely to show smaller fluctuations, but likely won't grow as much.

The general rule in investing is that the greater the potential for growth, the more risks you need to take. When you invest, you have to accept some level of risk. How much depends on what you want to achieve and how fast you'd like your money to grow.

Personalised Risk Attitude

Only you can determine your goals and how much risk you’re willing to take to achieve them. This level of comfort is often referred to as your risk attitude or risk appetite, and your ability to withstand losses is known as your capacity for loss.

Long-Term Perspective

Pensions are long-term investments. You typically can't touch the money in your pension pot before age 55 (57 from 2028), and you might not need it until much later when you retire. This means you can invest the money differently compared to money you'd need shortly, say, to pay a bill next month.

Value fluctuations are normal. Investments do fall in value from time to time, but they generally tend to rise over the long term, although this is not guaranteed. If you have several years before drawing your pension, your pot has time to recover from short-term market fluctuations.

Balancing Safety and Growth

It’s natural to want to keep your pension pot safe. After all, it's crucial. But complete safety, like only holding cash or bonds, might limit growth. Historically, company shares have performed better than cash or bonds over the long term, though there's no guarantee they’ll always do so. The type of investments a fund holds affects its risk profile, i.e., whether it's low, medium, or high risk.

Higher-risk funds have the potential for higher returns over the long term, but they might lose value due to market volatility. Lower-risk funds might be less volatile but could yield lower returns.

Over to you

Understanding pension fund risk ratings can help you make informed decisions that align with your financial goals and risk tolerance. At Penny, we believe you should be in control of how much risk you’re comfortable taking. Pensions are long-term commitments, and the right balance between risk and reward can help you grow your retirement pot effectively.