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Please help me . Choosing a pension from Aviva . It asks if I want growth or income ? Which one do I choose ? I'm 46 .
Ria, Greater London
11 September 2017
Holly Mackay
We obviously invest to make money. And hope for better returns than cash. The money we make can either be paid out to us as income or represent itself as growth.
Here’s a basic analogy. Imagine your pension is like a bag of Minstrels. Every year you get given an extra Minstrel. You can choose whether to eat it there and then or whether to pop it back into the bag and stockpile more Minstrels.
It’s the same with your investments. When companies you invest in make a profit, they can either re-invest that cash in making themselves bigger and better, they can stockpile it in the bank or they can give a bit back to their shareholders. Any cash they pay out to shareholders is called a dividend. This is like some income for you. You can either choose to take that cash when it’s offered, or re-invest it and buy more shares with it. Foregoing the cash today for a bigger pile of shares. And that’s the difference between investment for income and investing for growth.
As an example, £1,000 in the UK stockmarket might pay you an income of about £20-£30 a year. Growth investors will choose to ‘re-invest’ this and increase the number of shares held. Which they hope will go up in value too.
If you could use some income to boost a salary or a pension, for example, you will probably want the income option. If you’re saving for something like pension which is at least a decade away, it probably makes sense to grow your stash and consider any ‘growth’ option to boost your savings.