From today, cold calls about pensions are illegal in the UK, after a long series of scams. Almost 11m unsolicited contacts are made a year. But it is worth noting, as the BBC’s Paul Lewis points out, the ban does not cover texts, e-mails or approaches on social media. Beware.
This rule is necessary because of a change in government policy in 2015, which allowed people to take their personal pension pot* in cash, rather than buy an annuity (see below). This assumed that people would know how to invest for their retirement. Oddly enough, this policy change followed auto-enrolment, a policy which assumed that workers were not wise enough to save for their retirement in the first place, without a “nudge” from the government. In short, this is not joined-up government.
Sadly, a pensioner and his (or her) money are soon parted. The BBC’s You and Yours programme had a tale this lunchtime of a man who invested in a company that planned to build nursing homes, and offered a return of 15% a year. Instead, it went bust.
So here are some generic rules for what to do with your pension pot (clearly it is better to get specific advice from a regulated adviser. These are just guidelines.)
RULE 1: Do NOT put all your money into a single company, let alone one which someone has called you about. You face the risk that the company fails. Diversify.
RULE 2: But do NOT diversify into a bunch of companies that a salesman has told you about. They may all be scams. Rent “The Wolf of Wall Street” (based on a true story) to see the kind of people who are after your money.
RULE 3: Cash may be fine in the short term, or if you face an upcoming bill. But in the long term, the value of cash is eroded by inflation. This means your money buys a lot less 10 years from now. The best UK savings rates at the moment are 1–2%; inflation is 2.2%. Holding cash is a losing proposition.
RULE 4: Think about paying off debts. The return on debt repayment is the interest rate you are paying. On credit cards, this is a no-brainer; the rates are 20% or more. No investment scheme can match them. Even on a mortgage, variable rates are 4% or so. This is a hard return to beat from an investment, particularly after tax.
RULE 5: Think about an annuity. The good news about annuities is that the return is guaranteed for the rest of your life; you will not outlive your money. A single person at 65 can get around 5.4% at the moment. This offers no protection from inflation; index-linked annuities pay around £3,200 a year but rise in line with prices. The bad news, of course, is that the capital disappears when you die; in effect the annuity pays you back your capital as well as interest.
RULE 6: If you want to earn more than an annuity rate, remember there is no way of guaranteeing this. If you invest in equities and the market crashes, your capital will fall in value. The market may bounce back, but people in Japan thought that in 1990 and the Tokyo stockmarket is still below its 1989 level. So you are taking a risk.
RULE 7: If you are willing to take a risk, then you are going to need proper advice. But diversification is the underlying rule. First, a good adviser will recommend a fund run by a professional manager such as Vanguard or Blackrock. This pools your money across a wide range of companies (see rule 1). Don’t just buy equity funds; there are bond and property funds. Don’t just invest in the UK; we have seen that the UK market and economy can underperform, and sterling can plunge. And watch the fees. Index funds charge a fraction of a percentage point a year; the total fees on other funds can be 1.5–2%. Like inflation, this will erode your capital over the long run, with no guarantee of beating the index.
RULE 8: You need to decide how much income you take from the fund each year, a drawdown rate. Let us say you take 4% a year. That means you need a pot that is 25 times your desired income. So if you are hoping for £20,000 a year, that will require a pot of £500,000. If that seems a lot then the final question is: can you afford to retire?
*From what is called a defined contribution pension. Final salary pensions, where the employer pays a proportion of the worker’s earnings, were not affected.