How’s Your Pension Looking?

Many of us worry about funding for our retirement. That’s because pensioners need to balance the fact that they can no longer rely on a dependable monthly salary with additional inheritance and care costs – and because of that, it seems that each pound is split several ways. Many of us also want to earmark our savings for the finer things in life. To live the life and lifestyle we dream of.

The average pensioner today, is someone who has an employer’s pension that pays out around £18,000 a year, alongside an £8,000 state pension and maybe an average of 9k rental income from a second property, which means they will have enough to live on. It is also typical for the same pensioner to own a separate private pension with an average value of around £115,000 on top of that. Others may have more than one, with a value that is considerably more. With a private pension, it’s also not uncommon to see half of it sitting in cash for fear of falling stock markets, along with an additional £25,000 invested in stocks and shares in an ISA or similar.

If these same pensioners have no children, all they want to do is spend their hard-earned cash on trips before they croak. However, spending £10,000 a year on holidays, as most expect to do, will very quickly eat into the savings. If they then plan to keep some cash back to cover future care costs by investing a little here and there – time may not be on their side.

Many will acknowledge this stumbling block and be concerned that it’s a strategy not up to the obvious scrutiny. And if that ‘here and there’ style investing means numerous high risk moves, there’s most likely going to be a lot to be concerned about.  

Diversifying investments across different companies, types of asset and regions is a great way to reduce risk. But there is such a thing as over-diversification. If our retiree is adamant, they will want to achieve 8pc a year, which frankly is not very realistic, and there will need to be an overhaul of the current investments in many cases, especially if there happens to be a whole list of them. This is because the more funds and stocks you have, the less impact a single investment will have on the portfolio. Less is more!

The long-term return of the stock market is just over 5pc a year above inflation. To beat that, it will require emphasis on higher-growth areas of the market. And that means our retiree will have to decide whether they are comfortable taking that risk. That will also mean reducing the number of funds. And if our retiree doesn’t have enough conviction to add additional monetary funds into them… they would need to ask themselves whether they were worth owning in the first place?

To achieve the 8pc return will require a high level of risk, but our retiree should not take such a risk with the ISA if the aim is to match inflation. Our retiree should therefore focus on less volatile investments. With a pension that is based on a mixture of cash and active global stock market funds. The retiree’s current approach will see virtually no return on the cash, and his funds carry a relatively high cost. Both will hit his returns. A far more realistic return of 6.5pc a year, before charges, can be boosted by lowering his costs.

It is understandable to be nervous in the present market, so holding more cash may seem sensible now, but there is much to be said for the old adage “time in the market will outweigh timing the market.” Being invested should improve the chances of achieving growth in excess of cash returns, and if our retiree is sticking to his guns and still wants 8pc, then our retiree needs to get moving and put it into action.

Research has shown that over the long term it is better to invest your spare cash in one hit rather than drip feeding it over several months, and that’s because what is termed ‘the sweet spot of phasing’ can take between 24 and 36 months to produce fruit.  This comes with risks still – therefore by phasing investment over, let’s say, five months at £10,000 a month, our retiree would avoid anchoring to one point of entry.

When the final decision is made for the direction our retiree wants to take, they should think about it this way…  which would disappoint them more: that their money could go down overnight… or that our retiree might miss out on some sizeable gains? In the end, it will always be our retiree’s decision.