Having cash in a deposit account is nice but, with interest rates so low, using other types of investments for your pension gives you a better chance of a real return, albeit with a greater risk. If you are looking to invest directly into shares, use funds or just want tips about how to go about investing to produce a fund that supply you an income in later life then this section aims to help.
Studies have shown that shares (equities) are one of the best long-term investments as they tend to outperform Government bonds, property and other types of assets.
However the value of shares can fluctuate quite dramatically but, over a long period of time, shares have consistently produced good returns. So if you are investing in shares you need to think about the long term and your attitude to risk. Have a look at the video below from Quietroom to help you understand 'What is risk?'.
Shares give two types of return, capital growth and annual income in the form of dividends. Companies pay dividends on their shares when they are in profit and have cash to spare, typically twice a year. Shares in companies that pay generous dividends are often known as income shares.
Both the income and growth from shares are subject to tax. Financial products such as ISAs or pensions, including income drawdown plans, can be tax advantageous when receiving dividends.
You can buy shares directly through a stockbroker, although this is now quite expensive, or via an online service often called a fund platform where the platform holds the shares on your behalf.
Buying individual stocks leaves you exposed to the performance of the individual company, as BP shareholders found out after the Gulf Oil spill in 2010. One way to avoid this risk is to spread your money over a number of companies in different industries, which is called diversification.
The way many people achieve a diversified portfolio is through a fund which are a portfolio of shares managed by a professional investment manger. You are able to buy shares or units in a fund which gives you a part of the overall portfolio. As the value of that portfolio changes so does the value of your share or unit.
There are two main types of funds, investment trusts and open ended investment companies or OEIC. Investment trusts are companies in their own right and have a fixed number of shares they can sell to you. This means that if the investment trust is in demand from investors the value of its shares can be greater or lower than the total value of its portfolio.
OEICs can issue as many shares, or units, for people to buy as they like. This means that the total value of an OIECs issued units or shares is always equal to the value of its portfolio.
There are thousands of funds available, investing in almost every conceivable investment and with different objectives. Some focus on producing high levels of dividend income whilst many just track a market index such as the FTSE100. Our Guides section lists all the sectors where funds invest.
Fund factsheets are a useful way of finding out about funds and these can be readily found online.