Advice sought for pension investment for 24 year old

scotsbob

My 24 year old son is a sole trader and wants to start saving for a pension.

He has £700 per month (approx) to invest.

The criteria is he does not want to pay a commission to any advisers or managers.

He wants a no risk investment.

He is not concerned about getting a lump sum, only a monthly pension at the end.

I am suggesting to him that he uses his maximum ISA contribution and then index linked savings certificates.

Is there any way he could invest and ISAs and NI savings and get tax relief?

Any other suggestions?

vbm

There is no such thing as a no risk investment for a 24 year old when looking at retirment planning imo.

Funds that are traditionally 'no risk', like cash are a terrible investment for a potential 40 year plus time frame. His funds would run the risk of not keeping pace with inflation.

According to the Office for National Statistics (Financial Statistics) and M&G data, from the launch of the FTSE All-Share Index in April 1962 to February 2010, shares have beaten cash in:

77.9% of all 5-year periods
92.3% of all 10-year periods
100% of all 15-year periods
100% of all 20-year periods

And from April 1962 to February 2010 the annualised growth returns have been:

FTSE All-Share 10.6% a year
Building Society 5.6% a year
Inflation 6.0% a year

Also the lump sum he is not concerned with is always worth having because it is tax free. At least if he saves in a pension wrapper.

Sounds to me like he would be much better off if he did speak to an advisor who could explain some of the contradictions in his criteria.

dunstonh

The criteria is he does not want to pay a commission to any advisers or managers.

Well he cant have a pension then as no provider does it for love.

He wants a no risk investment.

also doesnt exist.

I am suggesting to him that he uses his maximum ISA contribution and then index linked savings certificates.

Bit risky for a 24 year old though.

Any other suggestions?

Tell him to adjust his criteria as it is unrealistic. He is a sole trader and he should have the common sense to realise that nothing is free. He also needs to learn about risk. Not just investment risk but also shortfall risk and inflation risk.

scotsbob

Dunstonh

My understanding was that there was no risk in investing in National Savings Index Linked nor in bank deposit funds up to £50,000 per institiution.

Therefore why would you say there is no such thing as "no risk" and why is it risky for a 24 year old?

scotsbob

vbm wrote: »

There is no such thing as a no risk investment for a 24 year old when looking at retirment planning imo.

Funds that are traditionally 'no risk', like cash are a terrible investment for a potential 40 year plus time frame. His funds would run the risk of not keeping pace with inflation.

.

I thought the whole point of NI index linked savings was that they did give a return that was linked to inflation. Have I got that wrong?

bristol_pilot

A 24yo ought to be investing in med-high risk investments like equities. NI index linked savings are for oldies. Plus, investments outside a pension wrapper are vulnerable in the event of bankruptcy which, as a sole trader, is not a remote possibility. He definitely SHOULD see an IFA, preferably one that works for a fixed fee rather than commission (as he doesn't want to pay commission). DIY is only suitable for people who know what they are doing...with the greatest of respect, that is clearly not the case here.

Linton

scotsbob wrote: »

Dunstonh

My understanding was that there was no risk in investing in National Savings Index Linked nor in bank deposit funds up to £50,000 per institiution.

Therefore why would you say there is no such thing as "no risk" and why is it risky for a 24 year old?

A major risk for any pension planning is that you will have insufficient funds to retire when you want to retire. To see what I mean consider the following...

Assume you pay £2K/yr into a pension and increase this each year with inflation, assumed to be 3%. You have 2 choices -indexed linked bonds at inflation+1% or an equity based pension returning an unambitious 6%. After 40 years my quick bit of Excel shows that:

Option 1 - total value £308K
Option 2 - total value £468K

Looking at it another way you would need to pay £3K/yr into the index linked pension pot to achieve the same end point as £2K/yr with the equity based portfolio.

dunstonh

My understanding was that there was no risk in investing in National Savings Index Linked nor in bank deposit funds up to £50,000 per institiution.

There are four main risks

1 - investment risk
2 - provider risk
3 - shortfall risk
4 - inflation risk.

With the NS&I index linked certs you dont have investment, inflation or provider risk but you do have shortfall risk. At his age getting inflation plus 1% is far too low and he would typically be guaranteed to end up with a pot about the third of the size of a decently invested spread.

Therefore why would you say there is no such thing as "no risk" and why is it risky for a 24 year old?

Shortfall risk as above.

DiggerUK

scotsbob wrote: »

...My understanding was that there was no risk in investing in National Savings Index Linked nor in bank deposit funds up to £50,000 per institiution....

Scotsbob,
The only risk with NSI is if there is a total collapse of the national economy, and the currency becomes worthless.
Problems, not Armageddon, are just round the corner.
Excellent investment for a 24 year old. + no charges. + no tax on some NSI products. Would recommend Index Linked.

Same risk to 50K guarantee. + the interest rates at present time are not keeping up with price inflation. Don't recommend Cash ISA's at present.

Gold is a no risk investment, it will never become worthless. It's main claim to fame is complete asset protection.
The economy may go to hell in a handcart, gold never will.
If you want an S&S ISA investment check out Gold ETF's and Gold Miners. Plenty to choose from.

Tell him to concentrate on protecting the purchasing power of his savings in retirement, and not to fall for Gordon Gekko's promising easy profits they can't guarantee.

Best of fortune.

scotsbob

I am still looking for an answer to my original question

"Is there any way he could invest in ISAs and NI savings and get tax relief?"

Anyone?

bristol_pilot

And the answer is...no.