Starting A Pension

PennyCrayon_2

Hi,

I have been offered a company pension and need to instruct the group trustees to allocate the pension scheme to either the investment funds or the lifestyle option.


I need help with choosing the best option for me as i do not have a clue. I must allocate allocate 50% into funds managed on an active basis and funds managed on a passive Index-Tracking basis:

- Global Equity
- UK Equity
- Ethical
-Property
-UK Government Bonds
-Coporate Bonds
-Index-linked Government Bonds
-Cash

Or Lifestyle Option:

I just want to know which one carries the most/least risk.

Any advice most appreciated.

dunstonh

I just want to know which one carries the most/least risk.

least = cash
most = global equity (although ethical may match it due to restricted investment potential)

jamesd

If you're after ideas of where to put the money and you're under 30 years old you might consider starting out at 70% global equity and 30% UK equity and tweaking from there. Swap out say 10% each into corporate bonds and property to reduce the expected annual variation in value, if you want to do that. Then move some money around once a year to keep the percentage split the same as the one you started with.

You wouldn't want to pick just one, what you do is adjust the proportions of each to reflect where you want to be invested and how much risk/up and down movement and growth potential you want.

Moller

Also “funds managed on an active basis” are higher “risk than funds managed on a passive Index-Tracking basis”.

Now, fund managers will dispute this. But my point is that most markets go up over time – with dips and humps and the occasional slump such as we are in now. But overall the markets go up, and so will Index Tracked funds. But managed funds have an additional element of uncertainty; have you picked a good fund manager who will in turn pick stocks that out-perform the Index Tracking funds? Of course all managed fund promotional literature will focus on how great their past performance has been.

It’s interesting that you are not given the choice and have to put 50% into a managed fund. Managed funds usually attract higher fees.

dunstonh

Also “funds managed on an active basis” are higher “risk than funds managed on a passive Index-Tracking basis”.

Apart from those that are lower risk. The aims and objectives of a managed fund could make it lower or higher risk.

PennyCrayon_2

Hi,

Many thanks for all your advice.

Much appreciated

robnoblewarren

Hi we're thinking of creating a course to answer this question because - well - people are asking, and there is a lot we can say which would help. The course is already online but not tuned specifically for deciding which pension fund to choose yet, although it's 95% there.
Anyway:-
a) you understand that 'Global Equity' is not managed for best growth, but an almost static mix of the biggest equity markets? So this isn't a lot of managers running around trying to make you money - no, it's a couple of people tweaking the constituent parts of the fund to match a global index whether or not that's going up or down. And you know what happened recently. No thinking involved. To validate this, talk to the fund manager and ask "are you managing this fund to a benchmark?' 'is the benchmark a collection of equity indicies?'
b) the choice of fund you are now making according to research produces 85% of the eventual return. i.e. if you get this wrong, even the most wonderful fund managers won't be able to do much about it. The reason why everybody is blank minded about this is because in the last 50 years, the UK share market has produced good enough returns, hence the mantra that equities 'always make more money'. Read the World Bank reports and the IMF Global Outlook Reports to figure out if that's still true. It isn't: but read it for yourself.
c) Even if you start off with the right 'asset allocation' [that's the question you're asking], you can't leave it alone for ever. You have to monitor it, be able to know when to move again, because the world economy is moving towards a long recession (decade). So you need to learn 'when to sell' and 'when to buy' even if it's simply telling them when to switch fund. You knew you could do this, right? Maybe you think that you should be in Gilts right now, but you've figured that current index linked Gilts prices are so high that you can't buy them. So you go for cash. Then you need to know when to move into Gilts... that's what the course teaches. Was that clear? One choice doesn't do it: it's an ongoing thing.

Answering you clearly on which fund to invest in is investment advice, and that means nobody would answer you without knowing more about you. But I've shown you enough to get the answer for yourself, I hope.

CaptainCutshaw

Penny,

My pension is with Virgin Money, which is the only easy choice my employer gave me. Anyway... the general principle they have is to start off relatively high risk but can grow fast, then gradually move your money into low risk places as you get nearer retirement age.

So right now, most of the money goes into some kind of equity market. Equity markets almost always give higher returns over the long term, but quite often give poor returns short term.

For my pension, the stock market crash is not such a bad thing because I am getting more shares for the same money. I am hoping that the market recovers in the next 30 years or so. Of course the size of my pension fund in cash terms has fallen (so it feels bad -- I've paid in more money than I now have in the fund!), but this doesn't matter to me because I'm not going to convert it to cash for a long time.

If I was a few years away from retiring, I would want most of my money to be out of equity and in something low risk.

People will struggle to give solid advice on this thread because we don't know if you're 20 or 64. The choice you make will be totally different depending on this.

Cheers

Dave

jamesd

CaptainCutshaw, you say the Virgin pension was "the only easy choice". Was there another choice? The Virgin one is pretty bad and a bit of discussion might help you to a better deal.

PennyCrayon_2

I'm 24 and earn 20K.