Investment always has a level of risk.  The key is to have a level of risk you feel comfortable with, and a level of risk that could help your money grow.  It all depends on you, your circumstances and what you want from retired life.

Read this guidance to learn about types of risk, when it might affect you and how to minimise the risk.

Cautious risk Moderate risk High risk
Cautious investments tend to have a significant proportion of assets in bonds, gilts or bank and building society type investments. These investment options may hold other stock market investments, but their risks are mitigated by spreading the investment between asset classes

Moderate risk investments seek to provide greater returns than cautious or minimal risk investments, but like high risk investments you could suffer sharp drops in the value of your savings. They mainly invest in:

  • shares;
  • bonds with a higher risk of default; and/or property
High risk investments tend to be more specialised. They can fluctuate significantly in value because the risks are concentrated in one area, as opposed to being spread across different types of investment

Type of risk When might this hit me the hardest? How do I reduce this risk?
Inflation - The risk your money grows at a rate lower than the increase in the cost of buying the goods or services you need. Over the short term (a year or two) this may have little impact, but if your pension pot grows more slowly than the increase in the cost of goods and services the real value of your money could drop.  Over the long term this could be quite significant Where you’re some way off (five years or more) using your savings to provide an income, you should consider investments designed to provide a return which keeps pace with or beats the increased cost of goods and services over the longer term - such as shares or property
Capital - The risk the value of your savings will drop If you’re close (within five years) to taking an income from your savings, as there may not be enough time for the value to recover Consider spreading your investments, to reduce the level of risk and/or if you’re very close to taking a lump sum at retirement, a fund not expected to lose much value - such as cash
Increased cost of an income - The risk the cost of buying an income goes up and how much you have to live on goes down If you expect to buy a guaranteed income for life (an annuity) with your personal account in the next five years The cost of buying an annuity is closely linked to, among other things, returns on bonds and gilts. Consider investments expected to change value in a similar way, so the value of your savings closely matches the cost - such as the Annuity Preparation Fund
Currency risk – this occurs when you have investments overseas and the value of the pound rises. It means you get less money back for each pound. A bit like cashing in leftover holiday money and getting a higher rate to the one you had when you bought it When the value of the pound rises against currencies of countries where you have money invested. For example, shares in companies in the United States Consider spreading your investments across a range of countries, including the UK. You can also use investments where changes to the value of currencies has little or no impact - such as bonds, gilts or cash

The Trust offers you a choice of funds, categorised to meet your appetite for risk and help you understand the level of capital risk.

These categories are based on the Trustees' current view on how much the value of each fund could fluctuate. The Trustees may change their view on the categorisation of each fund, if the level of capital risk changes. Keep an eye on your investments to ensure your choices still suit you, especially as you get close to your target retirement age.

In a nutshell:

  • Cautious risk funds are designed to protect your savings from significant fluctuations in value. These types of funds are, generally, more suited to people with fewer years to invest (less than 5 years) who have built up their retirement savings and are looking to protect them from a sharp drop in value
  • Moderate and high risk funds are designed to help your savings benefit from the growth potential of investing in shares, property and alternative assets, while understanding at times the value is likely to fluctuate by a greater amount than minimal or cautious risk funds. These types of funds are, generally, more suited to people with many years to invest (10 years or more), as there is still time to recover from sudden drops in the value of their investments.

Spreading investments to reduce risk is called ‘diversification’. Like the saying ‘don’t put all your eggs in one basket’, your money is spread between different investments (also known as ‘asset classes’), so if one investment fund performs badly, not all of your savings is affected.

Diversification can help reduce the volatility of your portfolio over time, however it does not remove all risk and the value of your savings can still go down as well as up.

You might not be aware of what your attitude to risk is, and what risk types suit you. Try using our Risk Quiz to get a better idea of where you stand.