Your pension contributions are usually invested into funds, which give you access to a range of different investments.

Funds may specialise in a particular type of investment (the asset type), for example, shares in companies, which are also known as equities. An equity fund will spread the risk by investing in the shares from many companies, so if one particular company does badly the effect on the whole fund is limited.

Other funds invest in a mix of asset types, for example both equities and bonds, which are like an IOU from a company or government. These funds spread the risk of investing across different companies (for equities and company bonds) or governments (for government bonds), and spread the risk across different asset types.

Lifestyle funds invest in a mix of asset types, but the proportion that is invested in each asset type changes as you get closer to retirement. The reason for this is that some asset types tend to be lower risk than others, for example bonds are generally lower risk than equities. Lifestyle funds use this difference and invest more in higher risk and potentially higher return assets to start, then to reduce the uncertainty about the value of your pension pot on the run up to retirement they switch to lower risk, lower return assets.

We’ve mentioned the importance of investing in different types of assets and in different companies – this is known as diversification. Another important form of diversification is to invest in assets from different countries. All Moneybox funds invest across a broad range of companies.