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What should TheRateTart work on next?: Pensions

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    I have just entered into a 'final salary' pension scheme. Having never had a pension before, I don't know much about them, and due to stories I've heard am a bit dubious. I've heard that some of them are risky and don't perform, and I've heard some people claiming the money would be better off invested in something else, eg. an ISA or other high-interest savings account. Any advice would be much appreciated. Thanks!
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    Whilst there have certainly been problems with pensions, I think the extent of criticism has been overdone. And if you have been lucky enough to get into a final salary scheme, then I think you are definitely better off with this than ISAs.

    If you know all this already apologies, but final salary schemes are becoming increasingly rare because they are more expensive for employers than defined contribution schemes. Many employers have become concerned that with an aging population and increasing life-spans they will simply become un-affordable. Like I said, if you've still been able to get into one it is probably worth holding onto.

    I'm not an expert on pensions but I think a lot of the criticism in recent years has stemmed from 3 main sources;

    1. When Labour came into power Gordon Brown imposed a windfall tax on pension schemes. Some commentators claim that this seriously weakened the schemes and is the main reason for current problems.
    2. During the dot com boom many companies took 'holidays' from making contributions into their pension schemes, figuring because the stock market was rising so strongly they did not need to. When the market crashed many pension schemes were left with millions of pounds of deficits.
    3. Rising house prices have led many to see investment in property as a better bet than pension schemes. In my opinion this is just swapping one sort of risky investment for another
    4. Personal pension schemes gained a bad reputation after independent financial advisors were accussed of mis-selling these to individuals. As yours is a company scheme this isn't something you should need to worry about.

    As with any investment the secret is to have a balanced portfolio with a mixture of risk levels. I'd hang onto your final salary scheme, save regularly into a mixture of Cash ISAs and Stocks & Shares ISAs, and if you can afford to invest in a buy to let property, all to the good.
    • CommentAuthorkduggan
    • CommentTimeDec 15th 2006
     
    I support the 'spread the risk' advice. I am in the fortunate position of receiving a final-salary-based pension, from a company bigger and stonger than any insurance company. Safe, you might think? Well, yes, from a financial ability to pay perspective, yes, probably. BUT, what if times get hard and the company decides it will 'economise' on its pension provisions? Can they downgrade the pension payable to their existing pensioners? Difficult, maybe, but not impossible; and certainly possible for those still building up their pensions and not yet drawing them. They could tweak downwards or eliminate the inflation adjustment for existing pensioners, for example, which over time would become quite damaging. So, spreading your risk, across shares, property (commercial and private), UK and abroad, bonds, cash, etc, all makes sense, no matter how strong your company pension arrangements.

    One thing that the 'bubble burst' moneygofurther mentions in point 2 taught us, was to ask 'where is my investment ultimately residing?' You might have put your ill gotten gains 50% into an insurance policy and 50% into shares, for example; but if the insurance company has put your lolly into the stock market, and your policy doesn't cover you against downturns, a stock market crash wallops ALL of your loot, not just half of it. So your risk spread wasn't a spread, just an all-in-one-basket arrangement.

    Another comment on moneygofurther's musings above - some scurrilous commentators have suggested that point 1 above, Mr Brown's plundering of pension funds, triggered point 2, the crash. This, those wags allege, deprived investors (pension funds) of liquid assets (the plundered cash) to lend to business via the stock market (by buying shares) that lowered demand for shares and caused the abrupt fall in prices. Now I know that no readers here would subscribe to that theory, I'm sure it's just all down to an amazing set of coincidences. Aren't you?

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