Investing: the basics I need to know

If you’re a member of BRASS, AVC Extra or the Industry-Wide Defined Contribution Section of the Railways Pension Scheme, this information will help you discover how investments work and why they matter to you.

Contents

Investments can feel complicated if you don't know much about them so we've taken a big topic and broken it down into smaller chunks to help you understand some of the most important parts. You don't need to read everything in one go – unless you want to. Instead, you can dip in and out of the sections or jump straight to the part that interests you the most. Select from the headings below to get started.

Three piles of pound coins, made up of different numbers of coins

Introduction

We know investments can feel daunting.

What are they? How do they work? And what do they have to do with my retirement?

It can be tricky to make the best choices for your future if you don’t feel confident that you fully understand these things.

And while investments aren’t always an easy thing to grasp, it’s important to learn about them.

That’s why we’d like to take you on a short journey to make the hard stuff a bit easier. By the end, you will: 

  • understand what happens to the money you pay in
  • learn about your role when it comes to investing
  • understand the options you have, and
  • feel confident that you’re making the best decisions for your family and your future.

First, we’ll take a quick look at the basics of your pension...

1: The pension basics you need to know

What is a pension?

It’s a way of saving money for later in your life.

While you’re working, you regularly put some of the money you earn into your pension. Your employer may pay in as well. This helps give you an income in later life, when you might want to work less or stop working completely. 

Think of the beginning of your pension journey as getting an apple seed. In itself, a seed is just a seed, but  for it to grow into an apple tree, it needs to be planted in good soil, and well looked after.

Planting

The Railways Pension Scheme (RPS) is a workplace pension scheme that your employer is part of. You and your employer both pay into it to build up your pension.  

One of the good things about saving into your pension is that the money is taken from your wages before they get taxed, meaning you pay less tax. 

It's a great way of planting the seeds for life after work.

  
Where does investing come into it?

It applies to Defined Contribution (DC) members. This matters to you if you’re in BRASS, AVC Extra or the Industry-Wide Defined Contribution Section of the RPS. 

With DC, the benefits you get depend on how much has been paid in, how long you’ve paid in for and how your investments perform. We’ll come onto investments performance in a bit. 

But first, let’s take a look at what happens to the money you pay in and how it can grow by dipping our toes into the world of investing in section 2...

 

2: The money you pay in goes on a journey

We’ve covered the basics of how your pension works in section 1. Now let's take a look at what happens to the money you pay into your pot.

Your contributions are invested 

The money you see come off your payslip towards your pension isn’t just sitting idle. It goes on a journey into the world of investments. It’s invested by a company called Railpen, on behalf of the Trustee, which looks after the interests of Railways Pension Scheme members.  

When you pay into BRASS, AVC Extra or the IWDC Section of the Scheme (the DC arrangements), the size of your pot depends on how much you contribute and how much this grows through investment returns.  

A sign with separate yellow arrows pointing this way and that way
Railpen invests your money in a few ways 

With your DC pension arrangements, Railpen invests your money into investment funds or ‘strategies’. You can do this yourself if you want to be more hands-on with your investments, or the Trustee can do it for you. We’ll explain more about this in a bit. Thinking back to the apple seed, investing is one of the things that helps your seed (or pension) to grow. 

The investment funds invest in assets like stocks (also known as equities) and bonds.   

Investing in a company’s stock means buying ownership of a percentage of that company.   

Bonds are when an investor loans money to a company or the government.   

The investment funds might also invest in ‘real assets’. These are physical things like property. 
 
How your money is invested depends on the funds or strategies you choose. It’s important to remember that you have this choice.  
 
With this in mind, let’s move on to section 3 and take a look at the options you have, starting with investment funds... 

3: Understanding different investment funds

We’ve already learned in section 2 that the money you contribute isn’t just sitting idle. It’s going on a journey through the world of investments after it leaves your payslip. Go back if you missed the last section on discovering what happens to the money you pay in.

When you’re choosing where to invest, you might want to think about: 

  • how you feel about risk
  • how close you are to retiring
  • any other pension benefits you have, and 
  • what savings goals or expectations you have for your pension pot

If you want to be more hands-on, you can choose to invest in one or more of the investment funds available.

A sign, with different arrows pointing to this and that, stood next to a small plant pot with a green plant growing. There's also a separate pile of coins and a £50 note

There are 7 investment funds to choose from.

These are:

  • Long-Term Growth Fund
  • Global Equity Fund
  • Socially Responsible Equity Fund
  • Corporate Bond Fund
  • UK Government Fixed-Interest Bond Fund
  • UK Government Index-Linked Bond Fund 
  • Deposit Fund

You can invest in as many of these funds as you want at the same time. You can also change where you invest at any time. The funds you choose will influence how much your pot may be worth when you come to take it.   

The investment funds are all different when it comes to ‘risk and return’. You can discover more about risk.  It has a big effect on how your pension pot’s value might rise or fall.  
 
There’s no right or wrong way to invest. It entirely depends on how you feel about risk, whether you have any other pension benefits and what’s right for you.  

Some members who manage their own investments choose to invest in higher-risk funds, like the Long-Term Growth Fund, which invests in a wide range of assets from around the world.   

Many members who do this then switch to lower-risk funds as they move closer to retirement. The idea of investing in lower-risk funds is to help protect – rather than grow – the value of your savings as you get closer to taking your pot. But this is entirely your choice. 

This approach is similar to what happens with Lifestyle strategies – which might suit you if you want to be less involved with managing your investments. We’ll look at these next in section 4... 

4: Lifestyle strategies

It’s no surprise that, when it comes to investments, one of the most common questions we hear from members is “how much do I need to be involved?”

If you are unsure about investing or just don’t have the time to manage things, you may want to think about Lifestyle strategies. 

With Lifestyle strategies, your money is invested in funds thought to be suitable for a ‘typical’ member who wants a particular outcome. While you’re still a long way from retirement, more of your money will go into higher-risk funds. When you get within 10 years of your Target Retirement Age (TRA), your money will gradually be moved into lower-risk funds. This can take the stress out of having to research and make your own investment decisions.  

Gardening tools

You should set a TRA that works best with your retirement plans, so that the move into lower-risk funds can be made at the right time. If your plans change, you can change your TRA. You can do this by logging into your myRPS account, or registering for one if you haven’t already done so. 

Whether you’re just starting out or you’re getting closer to your life after work, investing in a Lifestyle strategy means you don’t need to worry about becoming an investments guru, because all the work is done for you.  

It’s like planting your apple seed and then getting a team of professional gardeners to look after it for you. 

These are the 3 Lifestyle strategies available to you as a RPS member. The strategy that’s right for you depends on how you plan to take your pot.
  • Target Lump Sum
  • Target Flexible Drawdown
  • Target Annuity

Target Lump Sum is the default strategy for members paying into BRASS as members usually use their pot to firstly provide themselves with a cash lump sum.

Target Flexible Drawdown is the default strategy for members in the Industry-Wide Defined Contribution (IWDC) Section and the AVC Extra Section.

When we say ‘default’, we mean that this is the Lifestyle strategy your money will be invested in, unless you tell Railpen otherwise. The Trustee of the RPS chose the default strategies as they believe these will be a suitable option for most members. Your personal goals could be different to most members though.

You can invest in a mix of Lifestyle strategies and investment funds

You simply log into your myRPS account and choose what percentage of your contributions you'd like to go to each Lifestyle strategy and/or investment fund.

You'll pay a fee

A fee – known as an annual management charge – is automatically taken out of your pension pot on a regular basis. You can learn more about the annual management charges here.

Now that we've covered your investment choices, let's take a look at understanding risk in section 5...

5: Understanding risk

We’ve just covered how your contributions can be invested, but you can catch up in section 4 if you missed it. Now, let's take a look at risk.

Risk can be a scary word, but it's not so scary when you understand it. It's an unavoidable part of investing. And with investment risk, there's also potential for growth.

A house, shown alongside piggy banks and a pile of £50 notes.
Every investment has the potential to grow  

Let's say you buy a house for £150,000 and live in it for 15 years. There's a chance that in that time, the property could increase in value, and you could make a profit when you come to sell it.;

This depends on certain things, such as the condition of the house and if you've added any value to it, by installing a new kitchen or adding an extension, for instance.

It also depends on what’s happening in the world when you put your house up for sale, such as economic factors and other world events. If you put your house up for sale when there’s a shortage of houses, your property will have a higher value because it's in demand.

Over 15 years, you would hope the house would increase in value, but over one year growth would be less certain.

Every investment has a level of risk 

You might have seen or heard about ups and downs in the investment markets and how these can affect the value of people’s pension pots. This will always happen, it’s just the nature of investing.

With any kind of investment, there is a level of investment risk involved. Let’s say you put your house up for sale when supply is greater than demand. If there are more houses available than people wanting to buy them, you might make a loss on what you initially paid for it.

As supply and demand are constantly changing, which has an impact on the value of things, prices will change or 'fluctuate'.

When we talk about investment risk, we mean how quickly and how significantly prices change. This is known as the 'volatility' of returns.

Over the long-term, we would expect that investments with higher risk grow more and have a ‘higher return’ over the long term, but the ups and downs are more extreme along the way. There is more volatility.

Different types of assets experience different levels of volatility  

We expect funds with higher volatility to have higher returns in the long-term. But this is not guaranteed. They are also more likely to experience more volatility , so could also drop suddenly and sharply in value along the way.

The further you are from your Target Retirement Age, the more risk you may be willing to accept because, over the long-term, this could mean a higher return.  If you are closer to your TRA, then the level of risk you are willing to accept may be less.

Bronze scales, which appear to be balanced
Your pot value can go up and down

Market volatility will mean that the value of your pot fluctuates. This can be stressful, particularly when it comes to thinking about your retirement plans and savings. But the ups and downs of financial markets is a natural part of investing. It’s important to think about how you feel about this when making any choices.

Investing in different things can help during periods of market volatility

Investing in the Long Term Growth Fund – which invests in a range of different asset classes – or in several funds that invest in different types of assets can help you avoid being affected as much by volatile markets.

As asset classes perform differently, so one could help to compensate when the other isn’t performing as well. This is known as diversifying investments and can help to stabilise your returns.

In section 6, we'll think about the next steps you can take to help you make your choices...

6: What you can do to get started with your investments

We hope you now have a better understanding of investing and why it matters to you and the growth of your pension.

Here are a few more things you may want to do to help you plan for life after work:

Easily manage your pension with a free myRPS account 

You can log into or register for your free myRPS account. Once you’re logged in, you can:

  • see what your RPS savings are
  • see which funds you're already invested in (if any) and change them if you wish
  • check your Target Retirement Age (TRA) and change it if you want to, and
  • access all of your important pension documents
A shopping basket and a calculator
Retirement Budgeting Calculator

This tool can help you get an idea of how much your retirement lifestyle may cost. Give it a try to get an idea of your everyday costs.

Use the retirement planning tools

You can use the Retirement Budgeting Calculator if you’re currently paying into BRASS or AVC Extra and the DC retirement modeller if you’re a member of the IWDC Section to get a clearer picture of how much you’ll need for the lifestyle you want after work. This will help you check if your current savings are on track towards achieving that goal, and let you know if you need to make any adjustments.

Think about saving more if you need to 

Once you’ve got your savings goal in mind, if your current savings aren’t on track for the life you want after work, you can choose to pay more money into your pension, either by paying more into BRASS or AVC Extra or by making Additional Voluntary Contributions (AVCs) to your IWDC pot.

Get some financial advice 

Investment choices can be tricky and it can be helpful to get some financial advice if you’re not 100% sure.

If you’d like to, you can contact our advice partner Liverpool Victoria (LV) on 0800 023 4187. LV is authorised and regulated by the Financial Conduct Authority (FCA). LV may charge a fee or commission for their services. If they do charge, they will tell you before you agree to any financial arrangements they set up on your behalf.

You can also find independent financial advisers in your local area by visiting unbiased.co.uk.

What to read next

BRASS fund choices 

Learn more about the different investment options available to you within BRASS.

AVC Extra fund choices 

Learn more about the different investment options available to you with AVC Extra

Fund risk ratings

Learn which funds are low, medium and high risk and why that matters.