What is a mixed pension plan?

We tell you all you need to know about these financial instruments and why they are a great product for allocating your savings.

Now more than ever, many people are considering the need to invest their savings in a product that brings extra income when they retire. However, the average investor is sometimes disoriented by the wide variety of financial instruments available on the market, and it is difficult for him or her to decide on one product or another.

To begin with, investors have to decide whether to choose an instrument with a considerable level of risk but a high potential yield or to invest their money in products with greater guarantees but lower potential benefits. As a solution halfway between these two options, investors can opt for a mixed pension plan. In this article we delve into mixed pension plans and how to make the most of these products.

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This type of financial instrument has the great advantage of combining fixed-income assets with equities, which offers investors some security while giving them the chance to earn large profits. This would be a good option for what is known as the moderate investor, midway between the conservative and the resolute.

Before deciding on these plans, it is advisable to understand the difference between investing in fixed-income assets and investing in equity assets.

Investment in fixed-income assets

Fixed income assets, or bonds, are debt issuances — not stock issuances — generated by a company or country in limited amounts and with a defined maturity date. Selling this type of asset follows the same logic as granting a loan: the investor lends his money to a government or a company in exchange for repayment of the invested capital plus interest within a previously agreed period. These assets, however, offer a modest yield compared to other products. Additionally, these benefits can also be affected by the macroeconomic situation and the evolution of interest rates.

It is important to bear in mind that the "fixed" label refers to that fact that it pays a return via a coupon known ahead of time. Nevertheless, fixed income is also listed and its valuation fluctuates, although with less volatility than with equities.

Investing in equity assets

Equity assets, on the other hand, do not offer the same security as fixed-income assets, as neither the profits nor the return on the investment are guaranteed. These assets consist generally of stock, and their yield depends on the results and benefits of the economic activity of the issuing company. Equities have a high potential for profitability but also have a higher risk.

The evolution of share prices is not the only source of return, as some shares distribute dividends periodically in cash or in the form of new shares. Dividends are a part of the profit that the company decides to distribute among its stockholders.

Investing in fixed-income assets

It is never a good idea for an investor to allocate all his savings to equities products. While it is true that they offer the opportunity to generate high returns, there is also a risk that the value of the shares will fall, meaning not only will you not make profit, but you will also take heavy losses. On the other hand, many fixed-income products currently offer a very low yield, given that they are acutely linked to interest rates.

Combining fixed-income assets and equity assets into a mixed pension plan is a useful way to mitigate the negative aspects of both while making the most of them: on the one hand, the non-volatile and low-risk fixed-income component will act as a "cushion." On the other hand, the part dedicated to equities will help to gain the additional return that the investor wants.

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Finally, with regard to investment, there is an unwavering principle at play: diversification, which is nothing more than the technical concept of "not putting all your eggs in one basket." Regardless of the savings goals or the risk profile of the investor, it is essential to keep the capital divided between different options to avoid being subject to potentially disastrous market events.

At BBVA we have created our mixed pension plans so that you start making the most of your savings and benefit from the great tax benefits offered by these instruments. Visit bbva.es and try out our pension plan comparison tool to find the best one for your needs. Or contact one of our experts to receive personalized advice. It's never too early to work towards a good retirement.

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