Pension MoneySaving: Buy a different way to boost returns Article Discussion Area

EdInvestor

Investing a pension in cash will usually not be very effective because of the charges, and the dearth of high interest rate vehicles designed for the pension wrapper.

There are of course lower risk options for pensions investment, involving bonds and property rather than equities, which will suit those with a more cautious profile.

dunstonh

Using Lipper as the data source, the top performing cash fund grew by 6.41% p.a. before charges over the last 5 years (a fund not available to stakeholders as it happens).

The sector average was 3.68%. Take off 1.5% and you are left with a below inflation rate of return which makes cash funds unsuitable for long term retirement planning.

EdInvestor

It's possible to do a bit better in some Sipps - for instance Sippdeal has no annual fee and will give you 3.5%,but only for 20k or more.

But this more reasonable rate is not really designed for investment, but rather for people using the Sipp for pensions in drawdown mode,who want to keep a year's income in the cash account to pay themselves their pension every month.

Overall, pensions are not really set up for cash at all.

MSE_Martin

I find the argument over cash funds quite bizarre. Please re-read the context of the comment. There is no suggestion of using cash funds for long term planning, instead it is used in the context of illustrating that it is not the pension that is implicity risk, but the underlying investment!

cheerfulcat

I, for one, am arguing with your use of the word " safe " when referring to cash as a home for long-term money. It doesn't matter that it's only for illustration, it isn't safe.

EdInvestor

Actually the idea of using cash as part of a retirement investment asset allocation is a lot less silly than it used to be. It's long been regarded as quite normal to use low risk bonds ( gilts and corporate bonds) as part of a pension fund, but these days the difference between the return on cash and on gilts is very little - not enough to justify the additional risk involved in the gilt/bond investment, many people believe.

But this only really applies to a retirement fund in an ISA wrapper, not in a pension wrapper, for the reasons mentioned above, primarily charges and lack of competitive cash products.

[Deleted User]

A quote from cheerfulcat

"IMHO you are coming perilously close to giving advice; "

Whether meant as advice or not, this is how it will look to the public and I would have thought that some disclaimer would be necessary, ie to consult an IFA

ref cash: it would be important to spell out risk/reward in various model portflios. Cash at 4.5% less tax would potentially lead to capital erosion. Long-term gilts at 2.5% yield will lead to capital erosion etc. This is a big subject and the reader, as an individual, should be made aware of ALL options by someone qualified to give advice and regulated by the FSA. It would then be up to the individual to take the advice or not but I would say that seeing an IFA has to be the first step rather than taking what has to be seen as `advice` from a guru running a magazine style BB

Martin, I honestly admire you greatly for what you have achieved and how you have been instrumental in turning people`s lives around. I think that the article under discussion is a step too far but that is only an opinion.

homersimpson_3

I find the argument over cash funds quite bizarre.

I don't- I totally understand it. I know lots of people who suffered because of endownment crisis, made a complaint, won, scrimped on everything and paid off mortgage. These people have a company pension (final salary)and want to take out a personal pension to get free 22% of government. They don't trust financial advisors whatsoever and want no risk (understandable). Their isas are full. They are looking at cash funds because of the security element. They want cash funds which pays as much as highest interest building society account so money doesn't erode, they get 22% free of govt and they have total security.

dunstonh

I don't- I totally understand it. I know lots of people who suffered because of endowment crisis, made a complaint, won, scrimped on everything and paid off mortgage. These people have a company pension (final salary)and want to take out a personal pension to get free 22% of government.

Taking out a pension to get 22% tax relief is not a reason to do it. Its a feature of a pension. That's all. The way the proceeds are paid is far more important.

They are looking at cash funds because of the security element. They want cash funds which pays as much as highest interest building society account so money doesn't erode, they get 22% free of govt and they have total security.

homer, cash funds contain the risk of inflation. You say the money doesn't erode but it does in spending power. Its been a while since I last saw any inflation stats but the last batch showed that £1000 would have reduced in spending power to around £790 over 10 years. If the rate of return doesn't beat inflation, then the capital is being eroded in real terms. Just try and think back 10-15 years and remember how much a tank of petrol cost you. Try and find penny sweets now.

Until recent times, cash deposits paid less than inflation. That situation could return.

There is also the misconception that you have a choice of cash or stock-market and nothing in between and that you have to put all your money in one or the other.

They don't trust financial advisers whatsoever and want no risk (understandable).

That is not a realistic position for the majority of the public. It has never been safer to seek financial advice with the amount of consumer protection that exists and the number of mis-sales to the proportion of transactions that takes place is tiny. Historically, confidence always takes a bashing after a stock-market crash.

People who need advice often don't seek it and lose out far more. How many couples have the retirement planning in pensions all in one name and not split across both them? That costs you a thousand pounds a year extra tax in retirement due to bad planning. It can also cost the surviving spouse all their income on the death of the partner.

Retirement planning is about providing enough money for you to live on in retirement. That is the number one issue. Too many people jump in with "i must have a pension" as the number one priority and that is not the way to do things.

The people coming to this website and contributing to the forums can be "put right" on the pros and cons of ISAs vs Pensions. However, people reading Martin's articles on pensions and acting upon them need protection from their own naivety. Yes, DIY may save them £500 in commission being paid to an adviser but that's nothing compared to paying over £1000 a year extra in tax for 25 years.

EdInvestor

homersimpson wrote:

These people have a company pension (final salary)and want to take out a personal pension to get free 22% of government..... ....they get 22% free of govt and they have total security.

This idea that 22% is available "free off the Government" is just plain WRONG.
A pension is taxed at your full rate on retirement, which for the individual describe above with a final salary pension (and a state pension) is going to be 22%.

Only the 25% tax free cash sum is tax free. THE REST IS TAXED.

I make that 5.5% "free off the Government" for the basic rate taxpayer.

Is it really worthwhile to lock up 75% of your capital forever with additional restrictions on how much income you can take out, in return for a piddling 5.5% "free off the Government?"

I don't think so personally.Much better to put it in an ISA (no restrictions at all and no tax on either income or capital on withdrawal) or just put it in a high interest rate account and pay the 20% tax.The higher rate may well cover the 5.5% "free off the Government" and again there are no restrictions.