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A simple strategy for investing your pension

Working out where to invest your pension savings is a daunting task but splitting the money into three categories could help you gain perspective.


by Michelle McGagh on Feb 15, 2012 at 09:15

A simple strategy for investing your pension

Investing your own pension is a daunting task but there are simple rules to follow that will allow you to create a strategy that suits you.

According to Dawid Konotey-Ahulu, chief executive of pension fund adviser Redington, segmenting your pension savings into essential, luxury and nest egg categories can help to figure out where the money should be invested.

He warned that most people ‘massively underestimate how much they need to look after themselves’, adding that more people in their 40s and 50s are called upon to look after elderly parents while also providing for children struggling to purchase property or deal with student debt.

‘People are living to 95 or 100-years-old now, if you retire at 65 how will you fund maybe 30 years or retirement? One helpful way to [invest your money] is to divide your money into three in retirement and have three classes of assets,’ he said.

Konotey-Ahulu (pictured) recommends dividing your pension savings into three segments.

1.       Work out how much you need to provide basic necessities like light, warmth, food and a roof over your head – add up how much you would need to fund this for 30 years and invest this money in the safest assets you can find.

2.       What amount of money do you need for luxury or non-essential items such as travelling to see your children and grandchildren or taking a holiday? Put this money aside and invest in more risky assets.

3.       What amount of money do you want to leave to your children or grandchildren? You can take a lot more risk with this money. This segment allows you to grow your nest egg for a rainy day, or an emergency, or to give away to your family.

Konotey-Ahulu said: ‘You can work this out with an Excel spreadsheet. Look at how much you will need to keep the lights on - you will be surprised how much you will need, but it gives you a sense of a strategy for where to invest your money.’

23 comments so far. Why not have your say?

Tony Peterson

Feb 15, 2012 at 13:44

Point 1: Surely the safest assets you can find to cover your light, warmth, food, and a roof over your head is a stake in the companies that provide them?

Point 2: this is contradictory. The whole point of a luxury good is that it is one that you do not NEED. Oxymoronic.

Point 3: You are better off leaving your children and grandchildren armed with enough information to make their own way through life without depending on any inheritance from you.

One helpful way of getting through a long retirement is to stay in personal control of your own assets through your final years..

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Feb 15, 2012 at 13:53

You might disagree with the words - but having three distinct 'pots' is a good idea ( I did it about twoi months ago)

1. Should hopefully cover basics - annuity which is RPI linked (even at current cr*p annuity rates)

2. For 'nice-to haves' eg occasional different car, annual big holiday

3. The yachts / champagne and pass onto kids fund

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Feb 15, 2012 at 16:51

I have a selection of annuities for the first, an investment portfolio for the second and a couple of properties for the third. The principle is sound but don't allow yourself to become restricted by it, and set it up to suit your own particular situation.

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Feb 15, 2012 at 17:08

Its not unreasonable guidance but, doesn't actually help. So how much does it cost to "cover the basics", do you include care home costs? That's £1000 pw for 30 years (plus inflation).

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Colston Hicks

Feb 16, 2012 at 12:46

If life expectation is 95, working life will be 18 to 80, the time in retirement will still be 15 years. But the massive increase in the pension pot caused by compound interest(AER) over 62 years instead of 47 years will provide a very comfortable retirement for an 80 year hold person.

This, of course, depends on sanity returning and pension pots again relying on Gilts. Remember that before 1997 traditionally final salary pension schemes and 99% of money purchase schemes were funded entirely by Gilts.

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Feb 16, 2012 at 15:22

Colston Hicks - Speaking as a pensions lawyer with 20 years' experience, wherever did you get the idea that before 1997 pensions were funded entirely by gilts?

None of the many, many schemes I worked on were. Most had a maximum of 40% in gilts, and some were almost entirely in equities.

I thought only civil servants thought pension schemes were all invested in gilts - hence the disastrous GAD tables for pension drawdown . . . . .

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Colston Hicks

Feb 16, 2012 at 23:00

I will dig out the Financial Times editorial which stated this,

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Feb 17, 2012 at 11:23

Colston - Though I hesitate to say it, you shouldn't believe everything you read in the papers! Not even the Financial Times.

Most pension scheme trustees work on a long-term return of at least 2 or 3% above gilt yields, because they need to take account of increasing life expectancy and inflation. How on earth are you going to get that return if your scheme is funded entirely by gilts?

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Colston Hicks

Feb 17, 2012 at 13:29

Maverick, Financial Times, March 29 2005 3.00am---editorial -- " A traditional final-salary pension funded entirely by gilts would require savings of more than 30 per cent of salary."

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Feb 17, 2012 at 14:04

Colston - My point exactly. That's why you won't find any final-salary pension schemes funded entirely by gilts.

Salaries are usually the employer's biggest overhead. It can't afford to pay 130% of its salaries, even if it's called Shell.

Boots did adopt a 100% gilts investment policy for its final-salary scheme about 10 years ago. A couple of years later it very quietly dropped the policy. Even a well-funded scheme couldn't make it work.

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Feb 17, 2012 at 17:35

Bit of a tangent gents !

Article which provoked all this was suggesting that pension pots should be split into three with differing risk / reward profiles.

As I hit 65 in two weeks time... this is hugely relevant to me...

Annuitise about one third (RPI linked) ... how to keep the other 2/3 safely inflation proofed is my biggest worry (remember the 70s with RPI hitting c. 15 %p.a. !!)

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Colston Hicks

Feb 17, 2012 at 18:42

Maverick, you have missed the point, I said " WERE entirely funded BEFORE 1997". Boots 10 years ago was 2002 well AFTER 1997.

A final salary scheme is a defined benefit scheme, a defined benefit scheme is a guaranteed benefit scheme, a guaranteed benefit scheme needs a guaranteed fund, a guaranteed fund can only be created by guaranteed investments - GILTS. (ie BEFORE 1997).

There has never been any dispute that final salary benefits are guaranteed.But after 1997 it was falsely declared by economists that the employer guaranteed the final salary pension scheme benefits of their employees. This is totally false.

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Feb 18, 2012 at 13:29

Colston - I doubt whether there are many employers who have ever said their final-salary pension scheme is guaranteed. A final-salary scheme is a promise from the employer - work for me, pay your pension contributions, and when you retire you will receive a pension.

The employer does this by making investments which will grow enough to meet its pension liabilities in (say) 30 years' time. What it does not need to do is to put in enough on day one to meet the pension liabilities 30 years down the line.

A "guarantee" is (as always) only as good as the person giving it. If the employer is still there, it should meet its pension liabilities. If the employer goes under, it won't. If the annuity provider turns out to be as rocky financially as Equitable Life, it will not be able to provide a guaranteed annuity. If a government defaults on its gilts (Argentina, and perhaps Greece) the gilts will not be guaranteed either. Then if you do get a reasonable guarantee for payment of your gilts (this country), you get a yield on the gilts that barely beats inflation.

An employer putting all its final-salary pension fund in gilts will have to have much deeper pockets than any UK company I am aware of. That was as true before 1997 as it is today.

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Colston Hicks

Feb 18, 2012 at 18:25

Maverick, if the employer makes these promises,why do we have trustees?

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Feb 18, 2012 at 21:34

Colston - (Sigh) We have trustees to make sure that the pension fund is separated from the employer's assets, for two basic reasons : firstly, the employer can't get at it (and don't say Maxwell - all the Maxwell pension fund money was eventually recovered), and secondly, if the employer does go bust, the business's creditors can't get at it. Also the trustees have to make decisions about (e.g.) who the lump sum is paid to when the scheme member dies, where it would be inappropriate for the employer to decide.

Begging your pardon, aren't we getting rather a long way from "a simple strategy for investing your pension"?

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David Meyer

Feb 19, 2012 at 09:18

You can ignore Point 3

Buy some Whole-Life assurance when you are young and still healthy, and concentrate on Points 1 and 2.

I treat my annuity as my floor income, which gives me the freedom to take calculated risks with the rest of my capital. An annuity may not be what it was, but it does provide a guaranteed floor income.

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Colston Hicks

Feb 19, 2012 at 10:33

Maverick, I fully agree with your comment Feb 18 2012 at 2134 .

I do not agree with your comment Feb 18 2012 at 1329.

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Colston Hicks

Feb 19, 2012 at 10:38

Maverick, there is one point I should have mentioned. Maxwell held the money as a trustee, not as an employer.

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James Button

Feb 19, 2012 at 12:25

If you have (the ability/acess) to manage your pension fund yourself, then look at long term deposits in savings accounts, or ones that penalise you in the month you take out money - As in take it all out to move to a better rate account and there will be no penalty loss.


Mix RPI/inflation linked, and BoE base rate linked savings, selecting UK government (or maybe Irish) guarranteed accounts and stick below the government set compensation limit for any 'banking group'

Considering the governments apparent intention to reduce the allowed annual take from pension funds, you may find that a 'high-interest' paying account is as good as an annuity - and you get to keep your capital to invest later.

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Vague Shot

Feb 19, 2012 at 16:56

I had to retire early because of a stroke and although I have good pension, I can draw on in a few years, in the meantime I'm living on savings from the sale of my late wife's car and a few other things. I put the money into peer-to-peer lending site Zopa and have got a return over three and a bit years of nearly 6 percent including the minimal bad debt I've suffered.

It has been a much better place to put money that one of those Government sponsored theft schemes called annuities.

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Feb 19, 2012 at 16:59

@DGL: There is only so much you can allow for. I assume that your annuity will cover pot1 (on the assumption that inflation doesn't return to the levels of the 1970s and that the other 2/3rds you use for the other things in life?

My point was that there doesn't seem to be a way of deciding what is going to be "enough". As soon as you get into a "care loop", costs go through the roof. There is no way that any sane person can take on an annuity that would cover the cost of care in a care home these days for any period of time - care home costs are about twice the average annual salary today. Even though this only affects a small percentage of people, if its you its 100%.

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robert benns

Feb 20, 2012 at 17:13

Sorry folks but having read all that you have so far had to say, I can only add that my wife and I (celebrating our diamond wedding in April) have invested our savings in anything providing us with a good and safe return and having no thought for our four children ( eight grandchildren). They must learn to paddle their own canoe and the merit of our philosophy is that they don't have to worry about supporting us financially. Anything left over once we kick our clogs will be a bonus for them. The bulk of our income comes from investments in Canadian government and provincial bonds which provide a good and safe return as well as cushioning us in terms of currency. Surplus income (our needs are modest!) are reinvested in similar Canadian bonds and have out performed the returns from our few other investments. It s true that we are very fortunate living as we do in the south of France and letting part of our property to holiday-makers but there is nothing unique about that and open to anybody who is prepared to give it a go. Only one thing to add - steer clear of investment advisers! Good luck.

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gggggg hjhjkl;'

Feb 21, 2012 at 17:28

"Only one thing to add - steer clear of investment advisers! Good luck. "

That is the best piece of advice any one has given!!!

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