Much scaremongering is going on about the state of our pensions,
what with the market dropping more than 35% in the last year. This may mean
that the money you’ve saved over the last few years is now worth less
than you’ve put in, which is galling. But is it as bad as it appears?
Unless you are retiring within the next few years, (in which case you should
have been moving your pension into cash over the last 5-10 years anyway,) you
probably have time to wait for the recovery. We currently have significant
buying opportunities as the value of most assets are historically low, although
that doesn’t mean that you should rush into the market – there
are certainly no guarantees that we’ve seen the bottom of this cycle,
which is why most financial advisers herald the benefits of “pound cost
averaging”.
It’s not rocket science and is just a way of showing that, over time,
you will buy your investments at an average price. The benefit of a low market
means that, assuming that investments go up and down over time (and I think
we can all agree that they do!) you will buy more of your chosen investment
whilst the prices are low, and therefore have more of it when the prices are
high. The relevant point is not to stop saving at times like these when things
are looking bad. They won’t remain bad for ever and stopping your savings
now is akin to buying high and selling low – the first error of the amateur
investor.
Of course if you haven’t started your pension, then now is an excellent
opportunity to do so. Many of you will have seen your mortgage costs halve
over the last 3 months, and that money should be put to good use to increase
your assets – and not be spent, as our Prime Minister hopes, on the high
street. With his prudent attitude I’ll bet he’s not spending in
the M&S sales: He’ll be ploughing his spare cash into savings like
a man facing redundancy in 2 years!
If you haven’t started your pension, where do you begin? Well, unless
you’re an experienced investor, most advisors would say keep it simple;
you’re looking for a low cost safe place to keep your savings – and
that usually means one of the big brands like Norwich Union, Standard Life,
Scottish Widows or Legal and General. They all have a good range of funds to
choose from, which all tend to achieve steady, market average performance – they
are the Ford Mondeo of the pension world and hence suit most of us most of
the time. They all have a default investment option, usually referred to as
the lifestyle option, which means that the plan managers make the decisions
for you about when and where to invest. You don’t then have to worry
about moving your fund to safer areas in the years approaching retirement,
because it will automatically happen for you.
The most important thing is not to delay – procrastination will cost
you dear because it is the compounding effect of the growth of the investment
which increases the size of your fund.
If you start saving £200 per month and then increase your contributions
with inflation each year (I have assumed 2.5%), with the fund growing at 7%
per annum, you will end up with the following:
Age pension started Fund at age 65
25.......................... £192,535
26.......................... £179,523
30.......................... £134,868
Delaying just one year would cost you £13,000, which is 5 times the first
year’s investment.
The opinions expressed are those of the author and are not held by RedHanded
unless specifically stated. The material is for general information only and
does not constitute investment, tax, legal or other form of advice. You should
not rely on this information to make (or refrain from making) any decisions.
Always obtain independent, professional advice for your own particular situation.
My pension is down by 25%!