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Wednesday, 3 October 2012

Risks of a company or personal pension

With personal pensions and many company pensions, your money is invested, for instance in shares. This gives your pension pot the chance to grow over time, but it also means the value of your pot can go down. Here are some important questions and answers about the risks of pensions.

Investments can go up or down: what does that mean?

Many pensions are invested in stocks and shares, the value of which changes over time. This means there is an element of risk involved. Although there is the potential for your pot to grow, it is also likely that it will sometimes not increase as much as expected. Sometimes, it may go down in value.

Pensions are designed to be a long-term investment. Their value is likely to go up and down over time. If you look at the performance of stocks and shares over a long period, they tend to increase in value. And they have greater potential to increase in value than less risky investments such as cash or bonds.

If you have this type of pension, you can usually decide how it is invested. So you can choose the level of risk you feel most comfortable with.

How do I choose the right type of investment?

In many pension schemes, you have the option to choose what type of fund you want to invest in. It is possible to choose lower risk options if you like.

If you are not approaching retirement, it is generally sensible to take a long-term view of your pension. You may not need to worry so much about the value dipping in the short term. 

If you are approaching retirement, many schemes will automatically switch your money into lower-risk investments. These are less likely to go up and down in value in the short term. 

Is my money protected?

No financial products, including pensions, are ever risk-free. However, the government has put an increasing number of controls in place which are designed to minimise the risks. The rules are complicated and differ depending on the type of pension and who runs it:

  • the Financial Services Authority (FSA) regulates the providers of personal pensions 
  • the Pensions Regulator (TPR) regulates company pensions

If you are in a salary-related company pension, the Pension Protection Fund (PPF) has been set up to look after your interests. The PPF will compensate you if your employer goes bust and its pension scheme cannot afford to pay you all your pension. If you are in a company scheme, your employer can tell you whether it is protected this way.

Personal pensions are covered by the Financial Services Compensation Scheme (FSCS). The FSCS may provide compensation if an authorised financial provider cannot pay.

Follow the links below to contact any of these organisations.

Additional links

Being enrolled into a workplace pension

Starting from October 2012, millions of workers will be enrolled into a workplace pension

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