The benefits provided by a pension at retirement will depends upon the size of the investment fund in any money purchase scheme.

Making the right choice could be the difference between a comfortable retirement or one where sacrifices have to be made.

It's not just about investing in the best performing funds, its about investing in the funds that suit your risk profile and retirement strategy.

There are four main asset classes covering the available investment funds:

• Cash Deposits

The capital remains unchanged and the return comes in the form of interest paid. Therefore inflation erodes the value of the investment.

• Fixed Interest Securities

Loan issued by governments, companies and other official bodies. Interest is paid and the capital is repaid usually at the end of a pre-determined time.

• Equities

The most common type is an ordinary share in a company where returns are produced in the form of dividends and capital growth of the share.

• Property

Could be a direct investment in commerical property or could be via a property trust or shares in a listed property company.

Your attitude to risk will be very important when deciding suitable investments. Risk is a difficult concept and understanding the relationship between the level of risk taken and the potential return on investments is key to forming the right portfolio for you.

A high risk could have a potentially higher reward but at a greater risk of losing money. A low risk usually means a lower reward.

The two types of risk that can seriously affect the value of a pension fund are:

• The risk to the capital that has been invested .
• The risk that the income from the investment may not be paid when due or not paid in full.

This can be directly related to the asset classes mentioned earlier.

Cash deposits are virtually risk free as capital remains unchanged although inflation will erode the value of the capital over time.

Fixed Interest Securities are reasonable secure as they pay a regular fixed income determinded at outset and the capital value is returned on redemption. However, they generally don't protect against inflation.

Equities are riskier than the above investments because the company does not have to make dividend payments and the capital value isn't protected. There is a potential for higher returns although higher return producing shares are generally more volatile

Property has the potential for long term protection against inflation. There is risk, especially in direct investment if a tenant cannot be found and unless substantial funds are available it can be difficult to achieve a spread on your portfolio of different properties.

The following factors should affect your attitude to risk:

• Timescale

The longer you have until retirement the more scope you have for investing in riskier investments. This is because over the longer term the effect of short-term fluctuations to investments is ironed out.

• Wealth

If the pension fund is a relatively small proportion of your overall wealth then its possible to take a greater risk with your investments. If the pension fund represents your only source of retirement income then you are likely to be more cautious

• Past Experience

Past experience shapes our investment decisions as people who have experience of equity shares and understand how they work are more likely to be comfortable investing in these funds. If you've only ever had a bank account paying interest then you may be uncomfortable with the notion of shares.

There are various profiles given to investors and the most common are:

• No risk investors are not prepared to see any reduction in their capital and only invest in cash or short term fixed interest securities.
• Low Risk investors want a high proportion of their fund to be invested in cash and fixed interest securites. They may be prepared to invest in finds with a limited degree of fluctuation
• Medium Risk investors are prepared to see their pension fund fluctuate in return for potentially higher rewards.
• Medium/High Risk investors are prepared to invest in asset-backed investments and may invest in overseas investments.
• High Risk investors are prepared to invest largely in asset backed investments with only a small proportion of their money in safe funds and are happy investing in high-risk funds.