Are You Playing Russian Roulette With Your Pension Plans?
Retirement and pensions seem to far away until suddenly they're upon us. And it's often that we don't really examine our pension plans properly much before the big day. Which is very much like playing a game of Russian Roulette with your future income - spinning the money barrel and hoping that the answer doesn't come back to bite us.
Pension fund values can go down as well as up
Most pension funds here in the UK are invested in shares on the various stock markets.
But this can be deceptive. If you look at a graph for - say - the FTSE 100 index then, over time, it has grown. But the growth is really lumpy and the downturns are scary if they happen around the time that you're due to retire.
At the time of writing, the index still hasn't reached back to its all time high of 6930 which is hit at the end of 1999.
If your pension pot had been in shares and you had the misfortune to retire just over two years later, in 2002, then it had dropped down to a shade under 4,000. Not good news if the government rules said that you had to turn your pension fund into an annuity.
Unless you are flexible enough to be able to retire some time in a ten year period (maybe even longer) then leaving your future income to the mercy of shares is close to pure madness.
Conventional wisdom says that as you get closer to retirement age, you should shift your pension fund from shares into something less volatile like bonds.
But would you have made that call at the end of 1999? Or would you have been waiting for the FTSE to nudge over the psychological 7,000 barrier as it went into the new millennium? Would your crystal ball have been right?
Bond prices are set according to the interest rate paid by the bond. Depending on who has issued the document, they may be as safe as houses or - maybe if they were issued by Greece - they could be worth as much as the piece of paper they are printed on.
So, again, shifting your pension fund from shares into bonds will be a judgement call as to whether interest rates are due to go up or down over the coming years and therefore how your investment will change with those moves.
Another option is to put your pension fund into a different channel completely. Property prices are generally less volatile than share prices - they typically don't bounce around as much. And even in times of a property slump there are some properties that hold up better than others.
The yield from property is also more predictable. Share dividends are down to the individual companies and how well - or badly - they've done in that period of time. Rental income from property can also vary with voids but as a general rule if you've done your research properly then there should be a fairly steady demand for it. And you can always play around with the rental price if needs be, making your retirement investment plans that much more predictable.
Pension fund values can go down as well as up
Most pension funds here in the UK are invested in shares on the various stock markets.
But this can be deceptive. If you look at a graph for - say - the FTSE 100 index then, over time, it has grown. But the growth is really lumpy and the downturns are scary if they happen around the time that you're due to retire.
At the time of writing, the index still hasn't reached back to its all time high of 6930 which is hit at the end of 1999.
If your pension pot had been in shares and you had the misfortune to retire just over two years later, in 2002, then it had dropped down to a shade under 4,000. Not good news if the government rules said that you had to turn your pension fund into an annuity.
Unless you are flexible enough to be able to retire some time in a ten year period (maybe even longer) then leaving your future income to the mercy of shares is close to pure madness.
Conventional wisdom says that as you get closer to retirement age, you should shift your pension fund from shares into something less volatile like bonds.
But would you have made that call at the end of 1999? Or would you have been waiting for the FTSE to nudge over the psychological 7,000 barrier as it went into the new millennium? Would your crystal ball have been right?
Bond prices are set according to the interest rate paid by the bond. Depending on who has issued the document, they may be as safe as houses or - maybe if they were issued by Greece - they could be worth as much as the piece of paper they are printed on.
So, again, shifting your pension fund from shares into bonds will be a judgement call as to whether interest rates are due to go up or down over the coming years and therefore how your investment will change with those moves.
Another option is to put your pension fund into a different channel completely. Property prices are generally less volatile than share prices - they typically don't bounce around as much. And even in times of a property slump there are some properties that hold up better than others.
The yield from property is also more predictable. Share dividends are down to the individual companies and how well - or badly - they've done in that period of time. Rental income from property can also vary with voids but as a general rule if you've done your research properly then there should be a fairly steady demand for it. And you can always play around with the rental price if needs be, making your retirement investment plans that much more predictable.