Understanding risk

When you’re thinking about how to invest your retirement savings, it’s important to understand the different types of risks that are involved.
Annuity conversion risk

An annuity is the regular income for life that some people opt for in retirement. The price of annuities varies over time. There is a risk that your investments do not increase in value as fast as the price of an annuity.

For example, if the cost of an annuity rises faster than the value of your pension, you may lose out when purchasing your annuity.

Currency risk

Currency risk arises from the change in price of one currency in relation to another. For the Sky Pension Plan, currency risk arises when you’re invested in assets that are outside of the UK (which are not ‘hedged’).

For example, let’s assume you are a UK investor investing in American equities. Your investment return is affected by both the change in share prices and the change in value of the pound against the U.S. dollar.

Inflation risk

Inflation is a sustained change in the general level of prices for goods and services.

Inflation risk is the risk that the investment returns on your individual account are lower than the rate of inflation, meaning that the ‘true’ value or buying power of your individual account falls.

For example, as inflation rises, every pound buys a smaller percentage of goods or services, like bread or rail fares. If inflation rises by 1% in a year, but your investments have only risen by 0.5% in that year, the amount you can buy with your individual account would have reduced.

Interest rate risk

The risk that the price of your investments (mainly bond investments) may go up and down due to changes in interest rates.

For example, if the Bank of England increased the base rate of interest from 1.0% to 1.5%, the value of bonds are likely to fall.

Market risk

All investments can go up, as well as down. There is a degree of investment risk with all funds, as nothing is guaranteed to give a positive return.

For example, a global economic or political event might cause markets, and therefore the value of investments, to rise or fall.

Opportunity cost risk

The risk that the investments you choose do not perform as well as other available investment options. This is particularly relevant for younger members who do not take enough risk in their early years.

For example, if a member in the early years of saving for retirement invested £100 in equities over 10 years, this member’s savings would be more likely to grow more quickly (receive a higher return) than a member who chose a less-risky investment, like cash, however this is not guaranteed.

What do these mean for the Sky Pension Plan funds?

The table below shows how the level of risks described above affect each of the funds available in the Sky Pension Plan.

Funds Market risk Interest risk Inflation risk Currency risk Opportunity cost risk Annuity conversion risk
Yes No
No
No
No
Yes
 Yes No No
Yes
No
Yes
 Yes No
No
No
No
Yes
 Yes No
No
No
No
Yes
 Yes No
No
Yes
No
Yes
 Yes No
No
Yes
No
Yes
 Yes No
No
Yes
No
Yes
Yes No
No
Yes
No
Yes
Funds Market risk Interest risk Inflation risk Currency risk Opportunity cost risk Annuity conversion risk
Yes No
No
No
No
Yes
Yes Yes No
Yes
No
Yes
 Yes Yes
No
No
No
No
Funds Market risk Interest risk Inflation risk Currency risk Opportunity cost risk Annuity conversion risk
Yes Yes
No
No
No
No
 Yes Yes No
No
No
No
 Yes Yes
Yes
No
Yes
Yes
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