Choosing a pension that is risk free

wanderer

I would like to start investing in a pension. I am cautious about the stakeholder pension as my investment can go down. I have a pension with the employer which may be insufficient,Are there other options for me with out risking my capital. Please advice

dunstonh

all pensions are risk free. Its where you invest that contains the risk.

You could invest in a cash fund but that would be pointless unless you have a year or two to go. Also deposit funds are prone to inflation eating up the returns. Which is a form of risk.

Risk reduces over time, how long do you have until retirement?

wanderer

I may have about 15 years to retirement. I would hate to invest my pension money in stocks and shares (previous bad experience)

EdInvestor

Hi wanderer

Since you already have a company pension I suggest you save in a high interest account using an ISA tax wrapper.With the ISA, you pay in out of taxed money but the fund you accumulate, and any income you take from it later, is tax free.

With a pension, although you get tax relief when the money goes in, you pay tax on the money you eventually take out ( apart from the 25% cash sum). For a basic rate taxpayer this isn't terribly attractive.In addition the charges are quite high, eating up 25-30% of the total fund over 25-30 years.You also lose access to the capital forever.

dunstonh

I may have about 15 years to retirement. I would hate to invest my pension money in stocks and shares (previous bad experience)

15 years and bad experience? blimey, what the heck did you invest in. The 1987 crash took 18 months to recover. The recent crash hasnt broken even yet but if you include dividends, it has. Makes me wonder how you managed to face a loss in the past.

Investing for 15 years and not including any stockmarket content for some of that period is a rather foolish view to take. Of course, its your choice but with pound cost averaging and a decent porfolio spread, including non stockmarket areas, and perhaps annual rebalancing, 15 years is fine.

In addition the charges are quite high

Charges on a cash ISA are high too. They are just shown in a different way. Or as the case is, not shown at all.

Pal

It also depends on what you measure risk against. Investing in cash runs the risk that it will not keep pace with inflation. Investing in the stock market or property runs the risk that it will not keep pace with inflation, earnings, the cost of purchasing pension or anything else for that matter. However both of these asset classes have risen over any historically significant number of years. Does this mean that they will do so in the future? No. But in the absence of any other information about the future, it seems like a reasonable bet to take.

Investing in index-linked or fixed interest Government bonds will tend to protect against the cost of buying a retirement annuity. Although the bonds may fall in value, the purchase price of an annuity will also tend to fall by about the same amount, which should result in your being able to buy the same amount of pension when you retire.

Investing in anything else is a gamble. Essentially what you are asking for is a with-profits funds which invests in a high proportion of equities but cannot fall in value. With-profits funds are out of favour at the moment, but personally I think that they will make a comeback over the next 5-10 years. There is simply too much demand from the investing public for an investment that provides the potential upside of the stock market with a capital guarantee.

ReportInvestor

dunstonh wrote:

Charges on a cash ISA are high too. They are just shown in a different way. Or as the case is, not shown at all.

Any MSEr who hasn't always got better than the base rate on their cash ISA isn't taking advantage of the opportunities the site offers. It's hard for most readers to understand how such a rate incorporates high charges.

Pal wrote:

There is simply too much demand from the investing public for an investment that provides the potential upside of the stock market with a capital guarantee.

That doesn't mean that such a product can easily be designed.

The funds got into enough trouble even before FSA insistence on transparency and adequate capital. How are they going to perform if you add in the additional cost of a guarantee and take away orphan assets?

The charges involved in creating and guaranteeing such a product will weigh on investment performance. And do the insurance companies want to tie up capital in this way?

Meanwhile investors can spread their risk and keep charges down by investing in a portfolio of different asset classes, perhaps including cash.

EdInvestor

Pal wrote:

There is simply too much demand from the investing public for an investment that provides the potential upside of the stock market with a capital guarantee.

Of course, people always want a free lunch. But unfortunately there's no such thing, as is now apparent, endowment shortfall anyone, zombie fund for dessert?

The most you're gonna get from now on is a Guaranteed Equity Bond I'm afraid.