Taking risks with pensions

Here is an oxymoron proposed by the financial community.  Britons should be willing to take more risks with their retirement savings and pensions.  Now, tell me if I’m wrong, but isn’t the entire purpose of a retirement fund to ensure that you will not be put at risk later in life?  The entire prospect of putting money into an investment that may die, leaving you penniless is, well, absurd.

A survey by Lincoln Financial Group shows that 70 per cent of independent financial advisors (IFAs) believe their clients should redesign their investment strategy.  They should embrace an element of risk if they hope to retire comfortably.

Now, correct me if I’m wrong, but isn’t this what American financial institutions tried to get people to do with mutual funds in the 1980s?  A scheme that left millions living on state pensions. I’m not scoffing at the number crunchers.  I’m just trying to look at this from a common sense point of view.

"IFAs play a crucial role in advising people on how to plan for retirement as evidenced by the 80 per cent share of new personal pensions business taken by the IFA and whole of market distribution channel in 2006," commented Helen Turner, the director of business development at Lincoln Financial Group, on the relevance of IFAs’ opinions.

"It is striking that IFAs believe that their clients now have to accept higher levels of risk in their retirement income planning and encouraging that IFAs will use their expertise and experience to help clients understand the issues when planning for retirement," she added.

This is true, but what good is a pension plan that bottoms out?

Many adults are gambling that their house will offer them a pension.  They hope the housing market will increase their equity to the point that they can afford to buy a small place somewhere quiet and live a comfortable life, hopefully in a tropical location.

Two  thirds of all UK adults will need more than a state pension to help them survive.  The Freetirement Generation report, by the Social Issues Research Centre (SIRC), revealed that 4% of people in the UK feel that the government pension is enough to help them live comfortably.  While 69% believe they will need £600 or more a month to live comfortably.

The report continued to state that 69% of current retirees have enough money to support their retirement.  People who are still employed envision a different picture.  One third expect to l struggle financially after they retire, while one in seven  already know they will regret not saving for their retirement.

Jeremy Ward, head of pensions marketing at Friends Provident , said: "Whilst the recent modest state pension increase may see more going into people’s pockets each year, our research has found that the vast majority of people need far more money than the state provides in order to live comfortably. Three quarters of people yet to retire expect to need more than £600 a month to live comfortably, significantly more than the state provides. Considering that a quarter of people haven’t yet started planning or don’t intend to plan for their retirement, this is something they can only dream about.

"By ignoring how much they need to save to live comfortably in retirement or how soon they need to start saving, many Brits are facing a potential pension shortfall."

So, if you cannot expect to live on the state pension, you need to take control of your own future. This doesn’t sound like the climate to take risks, instead it sounds like people should step back and make sure their pension is secure. 

Already, hundreds of thousands of investors watched £12bn of retirement savings go up in smoke, over the last 10 years because they are investing in some of the biggest althrough poorest performing pension funds.

Pension funds totalling £37bn from some of the biggest companies including Barclays, Zurich, Prudential, Norwich Union, Royal London, etc., have under-performed the FTSE.  This failure cost investors £11.5bn in lost returns, according to a report published by financial advisers Hargreaves Lansdown, which measured the difference the investors would have made if they invested in a tracker fund.

However, BDO Stoy Hayward’s John Porteous warns: "It’s not enough to just switch to the hottest "go go" fund. You need to choose a fund which matches your risk profile but offers superior performance."

There are two choices for people considering a change in their pensions.  Advisors agree that this the best choice for investments around £20,000.  First is a low charge stakeholder pension.  Second, is a self-invested personal pension plan, which may be more expensive but provides more choice with more active fund management.

The question shouldn’t be, ’should I sit back and let them risk my money so they can make more profit.’  It should be, is this pension fund giving me what I want. After all, a fair return on a lower investment is a lot better than nothing from an investment that promised a golden apple and delivered an egg.