Getting started with investing

Investments team
29 June 2021

When you invest in a pension or any other kind of investment, you’re giving your money the opportunity to grow to meet future goals. It’s not the same as saving into a bank account where it sits to earn interest. With an investment you're taking a certain level of risk with your money. This means your money can go down as well as up in value, so it’s recommended you invest for at least 5 years because the longer you invest, the longer you have to ride out any bumps in the stock market.

If you’re new to the world of investing or it’s something you’ve thought about, but haven’t done anything about yet, you might need some help understanding what it’s all about. We look at what you need to know before you start, and how you can take that first step into investing.

What is an investment?

An investment is something that’s bought with the expectation that it will grow in value or produce an income. Investments come in all shapes and sizes from art and antiques to wine and classic cars. But for most, investing means putting money in the stock market. You can invest in shares in single companies or in a fund, where you invest in lots of different company shares that have been packaged together for you.

A pension is usually your biggest investment

Besides your home, your pension is probably the biggest investment you’ll make in your lifetime. Pensions are normally invested in a fund or funds. The money you pay in - known as contributions - receives tax relief from the Government, subject to your individual circumstances, which helps increase the value of your savings.

If you’re employed, you’re likely to be saving into your workplace pension where your employer makes contributions as well as you. Some people, typically the self-employed, will have a personal pension. Whichever type you have, you’ll need to make a decision about where to invest your contributions. You’ll usually have a range of funds with different risk levels and investment approaches to choose from. You can change where your pension is invested, and many people opt to reduce their amount of risk as they get nearer to retirement.

However, if you’re a member of a workplace defined benefit scheme pension, you can’t choose where to invest, as this is usually managed by an employer.

Tax-free saving with an ISA

Another option to invest your savings is with an Individual Savings Account (ISA). They’ve been around for a while and are considered as an efficient way to invest because of their tax benefits. You don’t pay any tax on your savings in an ISA, and you can invest up to £20,000 per current tax year. You can invest in a cash ISA or stocks and shares ISA, or split your investment between the two, but you’ll need to stick to the £20,000 total limit across them both.

Investment Bonds

Investment Bonds also invest in funds but they include an element of life insurance. While providing life cover is not usually the primary reason for investing in an Investment Bond, it’s technically an insurance policy. These are one-off investments where you can’t pay in monthly. Some bonds have a minimum investment amount and will run for a set period of time, and many are for whole of life, meaning it will pay out on the policy holder’s death. You can take money out at any time, but there are usually tax implications for doing this.

The value of the bond at pay-out depends on the performance of the funds it’s invested in.

What to consider before starting investing

It’s important to think carefully before investing, so before doing so, you might want to keep these five top tips in mind.

  1. Investing is not risk free - you might not get back what you put in.
  2. Do your homework - research everything thoroughly and talk to a financial adviser for advice.
  3. Try and spread your risk - invest in different companies, industries, and regions if possible.
  4. Always think long term - investments grow your money gradually, so be prepared to wait.
  5. Review things regularly - check your investments often, so you’re aware of how they’re performing.

Pensions are a long-term investment. The retirement benefit(s) you receive from your pension will depend on a number of factors including the value of your plan when you decide to take your benefit(s) which isn’t guaranteed and can go down as well as up. The value of your plan could fall below the amount(s) paid in.