What kinds of investments should I think about?
Different ways you can invest your money to boost your income when you retire.
What sort of investments are there?
There are several ways you can invest your money. How you go about this depends on your individual finances, your attitude to risk and whether you can afford to make losses as well as gains. It’s important to understand the potential risks as well as the upsides of investing any money, particularly if you’re approaching, or in retirement. We recommend that you speak to a professional adviser first before you make any investments – particularly those that carry an element of risk.
Don't be scared off by the idea of the stock exchange – anyone can buy shares in a company. Once you become a shareholder in that company, you'll benefit from any profit, gains and income made by the organisation. This is usually paid to you as a dividend. Higher returns tend to be associated with higher risk shares, and lower returns with lower risk shares. You may have heard the phrase 'blue chip' or 'FTSE 100 shares' – these are shares in the largest companies on the UK stock market that are the 100 'most valuable'. These shares tend not to move up and down as quickly in price as other smaller and growing organisations, so are deemed to be less risky – however they may provide solid dividend returns.
A bond is like an IOU. When you buy one, you are effectively lending money to that institution for a period of time – usually over a year. That company then promises to pay interest on the bond at the end of the agreed timeframe. So if you invest £1,000 for a year at an interest rate of 3%, for example, you'll recoup your initial £1,000 plus 3% on top. Bonds are viewed as less risky investments but they aren't usually as financially rewarding as shares. There are several different types of bond:
- Government bonds – often referred to as 'gilt-edged' or 'gilts'. These are widely regarded as the safest types of bonds.
- Supranational bonds – these are issued by organisations such as the European Investment Bank and World Bank and are regarded as some of the safest bonds.
- Corporate bonds – these are issued by companies, and the higher the credit score, the lower the interest you are paid.
- Zero-coupon bonds – these are bonds where interest is not paid to you periodically, but at the bonds maturity (end) when the bond is repaid.
- Index-linked bonds – these are bonds where the interest and the amount you receive at maturity are linked to the rate of inflation.
- Convertible bonds – these are corporate bonds that give you the option to exchange them for an agreed number shares in the company.
A pooled fund (unit trust or investment trust fund)
It can be risky investing in just one or two companies and can require a lot of time and research. A popular way to invest in a series of companies is through a unit trust or investment trust fund, where a professional manager invests your money. They pool your money along with other investors and use it to buy a number of assets like bonds, cash and shares.
They then manage these assets to make sure the fund performs well. There are usually additional fees for this kind of investment – some investors charge more than others but they may also bring in a larger return.
If you opt for an investment fund, you could be offered the following kinds of fund:
- A fund specialising in specific assets – e.g. a fund focusing on shares in European companies.
- A fund that has a mix of different assets – e.g. a fund investing in both global shares and government bonds.
Another way to invest money is to buy property like a buy-to-let flat, or to own commercial property like a shop or factory. You could also buy shares in a property-related company. Property is one of the most 'illiquid' forms of investment as it can take some time to obtain a property and sell it again, so if the markets do move quickly, it can be difficult to move with them than it is for other investments such as bonds, shares or funds. It's also worth bearing in mind that from April 2017, the government are reforming the way that buy-to-let landlords pay tax and deduct the costs that they incur, so if you are planning to generate income this way (or already do), make sure you have considered all of the costs and tax implications.
Some people invest in economic commodities – raw materials like oil, gas, gold or even coffee or grain. You can do this by going direct to the company you're interested in or making an investment through an asset management fund.
Life insurance company funds
Instead of making investments directly, you can make them 'indirectly' through the use of other products such as pensions and ISAs. Life insurance company funds are exactly that – investment funds run by life insurance companies, that you have the choice to invest in through one of their products. Many also offer you the opportunity to invest in other fund manager funds as well.
Whole of life policies
These are life insurance products sold by life insurance companies where a proportion of the money you pay each month is invested in investment funds. When you die, a lump sum will be paid to your estate which is based on the amount you invested, plus any growth that has accrued over the time you held the policy. Or sometimes this is based on a guaranteed minimum amount that you agreed when you bought the policy.
Like whole of life policies, endowments are policies that you pay into each month for a fixed period of time and then at the of the term you may get back the total amount you invested plus any growth. Often used to pay mortgages off, endowments have become unpopular in recent years as many failed to grow enough to meet any outstanding mortgage obligations at the end of the term.
Pensions are a form of investment that usually offer a tax incentive on contributions you make. The money is invested in funds that aim to grow over time in a tax efficient way. There are a number of types of pension products available that are covered in more detail in our pensions section.
As well as being a savings product, ISAs also offer you the opportunity to invest in stocks, shares and funds. Similarly like pensions, ISAs offer tax incentives for investing.
Some ISAs now exist specifically to help save for retirement. For example, from April 2017 the government introduced Lifetime ISAs as a way of helping people between the ages of 18 and 40 to save for a property purchase or their retirement.
Read more about how you can go about investing your money for later life.