Index Linked Pension?

foncused

All my pension savings to date have been in ISAs, so I don't have a formal pension. I have now joined a new employer, who offers pension contributions to any personal pension as well as their group pension (Fidelity), so I need to start one.

Given the current economic climate, I would like something which guarantees a fixed rate above inflation (as do Index-linked Savings Certificates and Leeds Inflation Buster ISA). How can I achieve this with a pension?

dunstonh

Given the current economic climate, I would like something which guarantees a fixed rate above inflation (as do Index-linked Savings Certificates and Leeds Inflation Buster ISA). How can I achieve this with a pension?

You would pay more in charges than you would get back given the way inflation is going.

I suggest you learn about risk and reward as unless you are within a few years of your retirement, what you propose carries as much risk as investing in equities over the long run.

foncused

dunstonh wrote: »

You would pay more in charges than you would get back given the way inflation is going.

I don't understand; surely "something which guarantees a fixed rate above inflation" is unaffected by inflation?

I was thinking about putting Index-linked Savings Certificates into a SIPP; is this feasible?

EdInvestor

foncused wrote: »

I was thinking about putting Index-linked Savings Certificates into a SIPP; is this feasible?

No. You can however put money in some SIPPs in ordinary bank accounts and all SIPPs have a cash account at a bank in which you can leave money. Not economic at present due to inflation/low interest rates, but should be better later in the year. In the past 6 months some SIPPs have made cash offers for longer term fixed rate savings..

foncused

Thank you. Which pension do you recommend? I'm looking for something not exposed to market volatility, and which won't be eroded if inflation goes up.

brianrhill

In comparing the reasons for having a personal pension vs a company one, there are advantages and disadvantages to both. e.g. company pensions can have lower charges than personal pensions whereas personal pensions are more portable and may have more fund choice. Your attitude to risk, as Dunstonh implied, is very important and will help you or your adviser appropriately as to which funds to use. Your company scheme may well have a financial adviser "attached" you can discuss this with, although they may not be IFA's.

EdInvestor

foncused wrote: »

Thank you. Which pension do you recommend?

Aension is a tax wrapper.It contains investments, which you choose. Where SIPPs are concerned, the low cost online ones are the cheapest.

I'm looking for something not exposed to market volatility, and which won't be eroded if inflation goes up.

No such investment exists AFAIK.

dunstonh

There are three main risks, investment risk, inflation risk and shortfall risk.

Using the assets you want avoids investment risk. It would avoid inflation risk but it would leave you with shortfall risk. To compensate it will cost you more in contributions.

At the moment you seem to believe risk is either on or off. Its not. its a whole sliding scale and going to either extreme carries risks of a different sort.

foncused

Given the markets' current volatility, I'm prepared to take a temporary shortfall risk to avoid investment and inflation risk - I can always change later.

Debt_Free_Chick

I don't think you'll get an investment fund that guarantees a return of x% above inflation. You may find fixed income (or bond) funds that aim to produce a return of inflation +x% without any guarantee that they'll achieve this. They'll aim to do it via gilts and corporate bonds - and if they include corporate bonds, bear in mind the default risk i.e. the risk that the company fails to repay the debt (they go bust, effectively!).

However, most fund managers don't benchmark to inflation, but to something like the FTSE Gilts index.

The only investment that guarantees inflation +x% is an index-linked gilt. Gilts, in general, are more expensive to buy at the moment - compared with corporate bonds - as they have pretty much a zero default risk. Another thing you need to understand is that you pay a premium for lower risk, so you have to "buy" that reduced risk. And there's a trade-off in the expected return too, especially compared with equities. It's all part of the same argument really - with equities, the risk of volatility and the potential for investment losses is higher, but your "reward" for that is the potential for much higher returns, compared with bonds.

When looking at gilts vs corporate bonds, both carry less volatility and investment loss risk than equities (less, but not "none"). But corporates have a higher default risk. Applying the above argument, your "reward" for accepting the higher risk in corporates should be reflected in the potential for higher returns, compared with gilts - the "credit spread". That spread has been relatively stable for some time, but in November it rose signficantly, to the point whereby the additional yield (return) stood at over 3%, the highest it's been for 10 years. It's market's way of sayin - boy, with current economic environment (particularly credit crunch), the creditworthiness of companies is now much worse, the default risk is higher and therefore investors should expect a higher premium for this increased risk.

You may view this as too much information, but I've trotted it out as I'm not sure you fully understand (a) risk - or rather risks (b) the relationship between risk and reward and (c) consequently, the nature of the investment you think you want.

Finally, your comment about "changing investments later" ...... have you considered that equities are significantly cheaper than they were 12 months ago and that if you "bought later" the same investments might cost you more? Having said that, I don't believe anyone can "time the market" - those that appear to just "got lucky"

jamesd

You can buy index-linked UK government bonds (gilts) in a pension. You'd have to be insane to do so as a long term growth investment because they don't come remotely close to delivering enough of a return above inflation to provide a good pension income. Think maybe 1-2% over inflation compared to two to three times that, but with more ups and downs, for equities or a mixture of equities and corporate bonds.

For a short term solution you'd probably be better off with a mixture of AAA corporate bond fund(s) and high yield corporate bond fund(s). Both of those have some reasonable prospect of capital growth over the next year or two as/if the economies around the world start to recover. Index-linked gilts are also fairly likely to have capital growth but I don't think as much or as soon - they are more likely to grow in capital after inflation has increased and that will be after the recovery is well under way and the other corporate bonds and equities are recovering already. A mixture would be a good idea, so you do reasonably well whatever happens. All in one thing is generally bad planning.

More optimistic pieces would be say a UK equity income fund and a global growth fund.

A five way equal split between the things I've mentioned could do reasonably well over the next two years or so. Somewhere beyond that it'll probably be too short of equities.

Gilts that aren't index-linked are something for anyone cautious to avoid for lots of new money at the moment. Lots of talk of a bubble in capital values (which is another way of saying low yields (income)).

No warranty. This is my view looking at economic forecasts and how to exploit what they will produce if they happen. Predicting the future is inherently error-prone.