Pension or bank account

jaydh

Hi

Im new to this forum but it seems very useful. I am unsure what to do. I have just started a pension, about 1 year ago. Since the recent downturn in the economy, im wondering if I should stop paying into my pension and instead put the money in to a good saving account instead as its more secure. I have been hearing how pensions have fallen in value and arnt worth what they once were so I am worried this will happen in 40 years time when I come to collect it. The problem is I cant take the £1k thats gone into the pension already.

Any advice on whether to carry on with my pension or put the money into an account?

Thanks

Jamie

dunstonh

I have been hearing how pensions have fallen in value and arnt worth what they once were so I am worried this will happen in 40 years time

Pensions havent fallen in value at all. Pensions dont make or lose money. They are just a container for investments. Investments can grow at different ways and perform differently at different times. There are also different risk levels. A higher risk investment would zig zag in value quite a lot in the short term. A medium risk will still zig zag but to a lesser extent. Cash in a pension wouldnt go down at all but would only rise by a small amount.

Unless you think the next 40 years are going to be progressively worse than the year before then any decision to go with cash would be totally daft.

Any advice on whether to carry on with my pension or put the money into an account?

You need proper advice and need to stop listening/reading the rubbish you have been told so far. I suggest you go back to the adviser that recommended your pension and get some advice and education on how investments work.

Unless you are retiring now or in the next year and havent reduced your investment risk in advance (which you should always do when you approach maturity) then its a great time to be paying into investments on a monthly basis. You are buying units back at 2005 prices typically. You want to buy them cheap and its times like this that can go on to be the best times to buy for long term investing.

Investments zig zag, that is normal. You dont worry about short term volatility with 40 years to go. The thought of you even contemplating using cash for 40 years is just scary. You would really have to look at trebling your monthly contribution due to the lack of returns that you are going to get.

jaydh

I dont have a financial advisor, its a company pension scheme I am on, they match what I put in. I dont think it is a high risk but I dont know, its with Friends Provident.

I have heard from the news about peoples pensions not being worth what they once were etc...

I know that my Grandma is getting virtually nothing each month and has to go into her savings as interest rates are so low. Is this just an unlucky time for pensioners?

What do you mean by buying units cheap? You mentioned its like money in a pot.

Thanks for your help

Jamie

margaretclare

Jamie, if your employer matches what you put in each month then to turn it down is the same as turning down a pay-rise. You also get tax relief on your pension contributions. You'd be crazy to come out of this.

Friends Provident is a very good organisation. I used to have a stakeholder with them because I wanted ethical investments.

It sounds as if your Grandma is one of those people who thought she could use the interest on her savings to top-up her state pension. Yes, a lot of people are suffering from this - e.g. not long ago interest rates were 5% or 6%, now they're 0.5% or so. But if you relied on cash savings alone, when you come to retirement you could be in exactly the same position!

Do a bit of reading, look up Friends Provident, talk to the people at your company who deal with the pensions schemes, find out a bit more. You have a long way to go and no one can predict even 1 year ahead let alone 40.

As you've already been told, your pension is in an investment package and the usual advice for investors over a long time-scale is 'buy now while it's cheap'.

Good luck!

McKneff

Jamie, if your employer matches what you put in each month then to turn it down is the same as turning down a pay-rise. You also get tax relief on your pension contributions. You'd be crazy to come out of this.

here, here. Dont turn down free money !!!!

dunstonh

I dont have a financial advisor, its a company pension scheme I am on, they match what I put in.

So, look at it this way,

You pay say £100 into the pension and its only cost you £80 (as there is tax relief). Plus the employer adds £100. So, you have £200, buts it has only cost you £80.

To turn your £80 in a savings account into £200 would take over 37 years at 2.5%. Yet on the pension it does it overnight.

I dont think it is a high risk but I dont know, its with Friends Provident.

Friends provident are just the logo in the corner. You are not investing in them. You invest in the funds you choose.

I have heard from the news about peoples pensions not being worth what they once were etc...

media always scare monger. Panarama did a programme recently that was anti pensions but when they gave their case studies, the consistent factor was that they were only paying in tiddly amounts but expect loads. One wasnt even using a pension but used property but blamed pensions! Also, the phrase pensions covers multiple types of schemes and a variety of options. The media rarely differentiate between the types but bundle it all in as "pension".

The most common mistake people make is to not pay enough in. You cannot pay £50pm for 20 years and then expect the pension to pay you back £500pm for 25 years. Its totally unrealistic. However, that is a common expectation and when people dont get that, they slag the product off. Not their own bad planning.

I know that my Grandma is getting virtually nothing each month and has to go into her savings as interest rates are so low. Is this just an unlucky time for pensioners?

That has nothing to do with pensions though. Thats probably due to not putting enough aside in her working life and/or putting everything in cash and relying on interest rates when other things could be better.

What do you mean by buying units cheap? You mentioned its like money in a pot.

Say the unit price is £1 and your gross contribution is £100. That means you buy 100 units with that £100. With the stockmarket dropping last year, the unit price could be £0.80 now. So, the units you bought at £1.00 have lost money but your monthly contribution now is buying units at £0.8. So you get 125 units instead of 100. When the unit price increases again (as it has done in the last few months) and say the unit price goes to £0.90 then the units bought at 0.80 have made money but the ones bought at £1 have still lost money but not as much. Later when the units are £1.25, then the units you bought at 0.80 have grown even more than the units you bought at £1.0 are now in profit.

That unit price changes daily and in some years it could go up 20% and some years it could go down 20%. That zig zag nature over the long term typically gives returns that are higher than cash savings accounts.

If you paid £80pm for 40 years in cash savings at 2.5% then you would end up with a pot worth £66,579
If you paid £80pm into the pension with a matched employer contribution with an average return of 6% (net of charges) you would end up with a pot worth £383,393.

The cash one would grow each year and never lose money but the pension one would zig zag with some losses every now and then

jaydh

dunstonh wrote: »

The cash one would grow each year and never lose money but the pension one would zig zag with some losses every now and then

Thanks for the advice. What happens if it zig zags down when I come to draw money from the pension? Thats what im worried about, at least with a bank its safer...

jaydh

dunstonh wrote: »

Friends provident are just the logo in the corner. You are not investing in them. You invest in the funds you choose.

I have no idea where the money goes, I just pay it to them...Do I have options of where I should tell them to put it?

Cheers

Jamie

molerat

If the pension zig zags down by say 20% at retirement time, as dunstonh has illustrated above the bank deposit would be worth £66K and the pension only just over £300K

molerat

jaydh wrote: »

I have no idea where the money goes, I just pay it to them...Do I have options of where I should tell them to put it?

Cheers

Jamie

You need to see the scheme leaflets. There is usually a default option or a list of funds you can choose from.

dunstonh

What happens if it zig zags down when I come to draw money from the pension?

Sensible people either reduce their risk before they get close to retirement to reduce/remove the impact of a crash or they get their IFA to do it (tied agents cant) or they use a lifestyling fund with automatic risk reduction.