Reader Question:
I know you cannot give financial advice, but I have been paying £170 per month (indexed linked) into a Stakeholder Pension for the past ten tears and I am now very concerned that with all this QE plus charges, there will be very little to show for it when I retire in about 20 years time. I have been thinking about ceasing my payments and investing elsewhere. Your opinion would be greatly appreciated.
My response:
I suppose the first thing to highlight is that that you are invested in a Stakeholder pension plan. Stakeholder plans have to meet minimum Government standards which ensure that the charging structure is capped at a maximum of 1.5% a year for the first 10 years and 1% a year after that. Also there cannot be any penalties for stopping contributions or transferring benefits. So that should put your mind at ease as you are unlikely to get a cheaper pension product, although your investment options will be limited.
Impact of Quantitative Easing
In terms of Quantitative Easing (QE) calculating its impact on your pension is difficult. Certainly annuity rates could be affected as they are based on long-term gilt yields. So when gilt rates fall (which will likely happen if QE efforts continue in scale) so do annuity rates. That would mean that people nearing retirement will receive less income than they would have when they buy an annuity with their defined contribution pension pot (i.e. a personal pension plan). But second guessing annuity rates, especially if you are a long way from retirement, is impossible.
But having said that your underlying investments within your stakeholder plan could also be affected. Risk assets (such as equities) rallied after previous QE efforts both here and in the US, but the positive effect of each bout of QE has been increasingly short lived. With markets (not just equities) being influenced by QE your pension pot may be affected positively, offsetting the annuity issue, or negatively. But remember that a stakeholder pension is just a wrapper with underlying investments within. QE has the potential to influence all investments, not just those held in a pension. Plus don’t forget that your contributions into a pension are given tax relief which is particularly attractive to high rate tax payers..
Why not do both?
It does not have to be a straight choice between of investing via a pension or outside of a pension wrapper. You can do both, budget permitting. Speak to a financial adviser who can review your circumstances and retirement planning and advise on the best course of action for you. In the meantime the following articles may be of interest:
- Pension vs ISA - which is best for you?
- The 7 ways that Quantitative Easing (money printing) will affect you
- 5 minute retirement planning MOT
I hope that helps
Damien
Money to the Masses
Website: www.moneytothemasses.com
Twitter: @money2themasses
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