Are pensions invested?

Pensions and investing

Pension contributions are money paid into your pension. They can include:

• Money you pay in
• Money your employer pays in if you work
• Tax relief from the government.

Your contributions buy investments. This makes you an investor. There’s an overview of some different types of investments below.

Today, most pensions are defined contribution pensions. You build up pension savings by investing while you're working and use these to fund your retirement. However, there’s no guarantee that this pension pot will last for your entire life.

Investments can go down as well as up in value, so you may get back less than you pay in. The hope is that, despite market ups and downs, your pension savings will recover and grow over a decades-long working life.

Why is my pension invested?

Better chance for growth

Investing involves more risk than keeping money in a savings account. But, while markets naturally go through ups and downs, investments tend to offer higher returns over longer periods than cash savings.

Potential to beat inflation

Inflation is the rate at which the price of everyday goods, such as food and fuel, and services, such as getting your hair cut, increases. If the rate of inflation is higher than the rate of interest you’re getting on your savings, the real value of your money falls over time. That means it won’t buy as much of the things you need in the future.

Investing tends to offer a greater chance of growth that at least keeps pace with inflation. It’s why investing is generally considered a better way for your money to keep its buying power than saving in cash.

Where does my pension money go?

The money you pay into your pension can go into one or more of the following types of investments, generally through funds. Funds pool your money with other people’s money to buy a range of investments.

Common pension investments include:

• Shares (equities) – give you an ownership share in companies all over the world
• Bonds – loans to companies or governments that pay interest over a fixed period
• Property – generally commercial property, such as office buildings or shopping centres
• Commodities – goods and raw materials like metals, oil, sugar and wheat
• Cash – some pensions include a portion in cash, particularly if you’re approaching retirement or are looking to manage investment risk.

For more details, see our guide to the types of investments.

How is my pension invested?

Both your circumstances and the type of pension you have can affect how your pension is invested.

Workplace pensions vs individual pensions

Employers arrange workplace pensions. You make contributions and, if you’re eligible, your employer must also pay in. See what makes you eligible for employer pension contributions.

Defined contribution pensions are the most common type of workplace pension, but some workplaces still offer defined benefit pensions. These offer a guaranteed income for your life (and often your partner’s life, if you have one). This income is based on your average or final salary with your employer and the numbers of years that you worked for them.

If you don’t have access to a workplace pension, you can set up an individual personal pension. As with a defined contribution workplace pension, payments in build you a pot of money.

With individual personal pensions, you are responsible for choosing your investments and making sure they’re in line with your needs, so you might want to do this with a financial adviser.

Can I choose where my pension is invested?

When you join a workplace pension, your contributions typically go into what’s called the ‘default investment option’.

If you’re happy to have your money there, then you don’t need to do anything. You’re free to move to another option if you want, but most people stay in the default fund. Most pension providers offer a range of funds or portfolios in addition to the default. You can choose alternate funds on your own or get advice from an impartial financial adviser.

What is a default investment option and how does it work?

The default investment option exists to make sure your money is invested in a fund that’s suitable for you, without you having to choose one.

As default investment options try to support fairly broad investment goals, there’s no guarantee they’ll be exactly right for your specific needs.

However, they can offer peace of mind – experts designed these defaults and monitor them regularly. They’ll even adjust a default investment option if necessary to make sure it stays on track to get you and other people like you the best possible outcomes for retirement.

Your workplace pension’s default investment option is designed to meet the needs and general risk appetite of a broad range of people. So if you choose investments with more or less risk, it’s important to understand what that means and how it might affect the value of your pension both in the short and long term.

How much risk should I take?

Whether you’re investing for the first time or thinking about changing current investments, always consider how much risk you’re comfortable taking. Risk is a tricky concept to think about. More risk can mean more growth but also a higher chance of your pension losing money too.

When you think about risk in relation to pensions, it’s also important to think about how far away you are from retiring or taking money out of your pension.

Find out how much investment risk you’re comfortable taking with our risk profiler.

How can I check my pension?

For defined contribution pensions, your provider will usually send you a pension statement at least once a year. This will include key information such as your pension’s current value and a forecast of the retirement income you may be able to get.

Your provider may also have an app or a website you can log into to see details about your pension.

More information on pension investments

Now you understand more about where your pension goes, how your pension savings are invested and why it’s invested at all, find out why it’s beneficial to contribute to a pension early.