Magazine article The Spectator

Investment: Build Your Own Pension

Magazine article The Spectator

Investment: Build Your Own Pension

Article excerpt

Deciding the destiny of your retirement is about to get easier. But be sure you know the answers to these questions first...

If you want something done properly, it often pays to do it yourself. So it must be good news that as of 6 April, when George Osborne's pension reforms take effect, it will be easier than ever to run your own pension fund, because you won't be forced to retire as an investor when you cease to work for a living. Instead, everyone -- not just the rich -- will be allowed to retain ownership of their life savings and try to live off them by means of what is known in the jargon as 'income drawdown'.

But is a DIY pension right for you? Institutional funds are buying government bonds with both hands -- despite prices hitting record highs and yields falling to historic lows. This could be a recipe for future disappointment for individual savers, depending on what happens next.

Here and now, the important thing is that self-invested personal pensions (Sipps) can enable everyone -- including members of occupational schemes (a pension linked to your job) -- to choose our own stores of value to fund retirement, including shares, bonds, cash, property and gold.

However, more choices -- created by the imminent abolition of any compulsion to buy an annuity, or guaranteed income for life -- also means more ways to make mistakes. Here are six questions to consider before deciding whether to risk your life savings in George Osborne's retirement revolution.

What have you got?

If you are a member of company pension scheme -- or have the right to join one -- where your employer makes contributions to the fund, failing to take this benefit amounts to volunteering for a pay cut. This might sound obvious but millions do just that.

Similarly, if your occupational scheme is set up as a defined-benefit or final-salary fund -- check the annual statement -- then you should hang on to it as a low-risk way to fund retirement. You won't need to worry about investment returns or annuity yields. The only exception would be where you fear your employer might go bust or default on its pension promises.

Most private-sector schemes -- including all personal plans -- switched to a defined contribution or money purchase basis years ago. However, it's worth noting that everyone -- including members of both types of occupational pension -- has been allowed to also contribute to Sipps for nearly a decade. So sticking with the firm or going DIY is not an either/or choice; you can do both.

How can you tell whether returns are adequate?

If you read the annual statement all pension funds must issue -- and that single act will make you better informed than many members of a newspaper scheme where I used to be a trustee -- you will see total returns, usually shown on a calendar year basis. You can compare these with the relevant stock market index or fund performance figures available free online from independent statisticians including Bloomberg, Morningstar and Trustnet. Try not to focus on just one year's returns and consider at least five years; the longer the better. Also, make sure you compare like with like. Most pensions are managed funds -- or a mixture of shares, bonds and property -- which is likely to produce lower volatility and returns than pure equity strategies based on the FTSE All-Share or other global indices. Finally, remember that your employer may well pay the company scheme's costs, but is unlikely to do so for a Sipp. …

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