Investment types
There are three main types of investment - shares, gilts and cash.
Shares
This is a share of the future profits of UK and overseas companies. People invest in shares because they offer better long term growth than investing in cash or gilts and they may increase by more than the cost of living (inflation). However, the value of shares can go up as well as down and this may affect the value of your personal retirement account in the short term.
Gilts
These are loans made to the Government in order to fund its spending. A gilt is issued for a given redemption value at a fixed date in the future, and provides the holder with interest payments until that time. Gilts are different from shares because they offer greater security as they are less volatile. But their returns are generally lower in the long term and they either pay a fixed rate of interest or an overall rate of interest linked to inflation, for example index linked gilts.
Cash
Investing in cash is like a bank account, where regular interest is paid in return for an initial deposit. Cash investment is only appropriate in the short term, in the few years before retirement because it is a secure investment. But has no long-term growth potential and can be reduced by inflation in the long term.