Personal Pension

Author
Discussion

walm

10,609 posts

201 months

Friday 12th October 2012
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^Ha! Log scale - cheeky one.

I think there is plenty of room in a portfolio for precious metals.
But put all your eggs in one hugely volatile basket? - Only for the brave.

Newc

1,843 posts

181 months

Friday 12th October 2012
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Not me guv, just a cut ‘n’ paste from Wikipaedia!

But I read it as there have only been two periods (73-75, 05-12, excluding the artificial squeeze in 81) where holding silver made any sense. Not very compelling.

Newc

1,843 posts

181 months

Friday 12th October 2012
quotequote all
OK, I’ve caught up on all the excitement that’s been on while I was away. I’ll get on with the next FAQ instalment, but first I have two nicely relevant anecdotes from my recent travels.

I went to a Noh play, which for those of you who haven’t had the pleasure is a traditional Japanese theatre form, where the players, roles, plots, and scripts are heavily traditional and stylised and never change. It reminded me that I was missing this thread.

The second one is that I was caught by a currency crisis in Craptown, Nzgzzyzzistan. The merchant with whom I was negotiating decided that my renminbi was fake, and demanded something else. (They weren’t and I think he was on some personal currency convertibility scam but that’s not important). I said he could pick from yen, dollars, sterling and euros. As always, he went for the dollars. I asked him if anyone still paid with gold Rolexes or krugerrands and he said no, he hadn’t seen that happen for twenty years.

So I think the worthless fiat currency system is still working, provided of course you have the correct worthless fiat currency.


Newc

1,843 posts

181 months

Friday 12th October 2012
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6. How do I decide where to put my savings, whether in a pension plan or not
I’ve covered it a few times in the earlier sections, but it’s worth repeating. There isn’t a single right answer. Where you are in your life and what your expectations are for retirement are the biggest drivers for your decisions, followed closely by your view of future economic developments.

Crucially, decisions about whether to use a particular tax structure like a pension or an ISA is the last one to make, not the starting point.

The most frequent questions in this forum seem to be “I’m in my twenties and just starting to look at this stuff for the first time, where do I start”, and “I’m in my thirties and what I have doesn’t seem very inspiring, are there other things I should consider ?”. My personal opinion is that your first assumption should be that you are entirely on your own – the UK cannot afford a meaningful state pension and the real value of state pensions will continue to decrease and the eligibility age will continue to rise. Corporate employers will not go out of their way to help you either, so your quality of life is firmly in your own hands.

If you’re at the younger end and are anticipating house purchase, a family, change of career, further education, or similar major financial events, then I would argue that super long term savings are probably not the right way, and you should be looking at shorter term approaches with easily accessible funds. That would be cash savings accounts, funds, and tracker-style financial instruments. As you get past those life events and start to have more disposable income you can broaden out into a wider spread of risk/reward and longer term investments including property and single assets.

As it’s not possible to give a single right answer, perhaps I can just quote some general approaches to long term investment from Peter Lynch (a renowned US fund manager).

- Never invest in something you don’t understand

- Invest for the long term. Lynch’s view was that that "stocks are relatively predictable over 10-20 years. When predicting if they're going to be higher or lower in three years, you might as well flip a coin to decide." He monitored constantly the shares he owned, and as long as the story hadn't changed, he didn't sell.

- When investing in stocks, look for strong cash flows, low debt ratios, consistent yield over a period, and a low valuation-to-earnings-growth-rate ratio (last item is somewhat technical but assesses whether a company’s share price already assumes its future product plans will be highly successful)

- Investors should remember that expenses are their enemy. If investing across a market, use simple trackers with low expense ratios

Ultimately you will have to make these decisions based on your personal view of what the future holds for you as an individual and for the bits of the world that you interact with. Are we heading to a breakdown of western economies with food riots and mobs in the streets ? Buy tinned food, water, loo roll, and a secure property. Have we bottomed out and are in for an extended period of flat performance as debt is paid down or inflated away ? Buy market leaders who can extract maximum economies of scale. Are we close to a plausible fusion / solar / tidal energy source that will remove energy costs and lead to a third industrial revolution ? Sell all those AIM oil companies.

None of this is easy unfortunately, but it’s going to be ever more important for you to think about this stuff because if you don’t then you will be in for a hard time later in life.

Ali2202

3,815 posts

203 months

Friday 12th October 2012
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I thought I already had enough to worry about hehe

walm

10,609 posts

201 months

Friday 12th October 2012
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Newc said:
- Never invest in something you don’t understand
Sorry... I saw this and immediately thought of Longone.
getmecoat

Newc

1,843 posts

181 months

Friday 12th October 2012
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7. What happens to my money when I retire
This depends on how you are holding your savings. If it is in anything other than an actual pension plan, then retirement in itself has no effect. You can buy and sell assets and receive income in exactly the same way as you could when working.

For pensions, a few rules will now kick in. Of course if you are the retiring CEO of a large corporate with a full final salary pension, then all you have to do is decide which beach to hit for the winter. For all others there’s an initial decision to make about taking a lump sum payment.

The rules around this are tweaked all the time. Right now, you can take lump sums before you actually retire and before formal retirement age, but the underlying calculation is the same; am I better off with an amount in my hand today and a reduced pension payment, or a higher pension payment. The amount of the lump sum also moves around but it’s about 25% of the fund. I am not an IFA and this is not advice, but if you have a final salary pension I would think very very carefully indeed before taking any lump sum out of your fund. If you have a defined contribution or a SIPP then it’s usually an easier decision to make.

The lump sum is calculated as 25% of your entire pension provision, not of each fund. If you have both final salary and DC pensions, it may be possible to take the lump sum entirely from the DC plans and leave the final salary plan untouched. It depends on the rules of individual schemes so you would have to check your small print.

The lump sum is tax free and you can do whatever you like with it, including using it to invest. The remaining money stays in your plan, and this is where we come up against the most contentious part of pensions – the annuity.

The remaining money can only be used to buy an annuity, or to be drawn down as an income. An annuity is an insurance policy, not a savings plan. You spend the whole amount of your pension on a bet on your lifespan, and the word here is ‘spend’. That money is gone – spent. If you die the following day, that’s it. No refund, no returns, no inheritances. (There are flavours of annuities which include a spouse’s pension, but same applies when your spouse also dies). In return you receive a guaranteed monthly income for life, so if you do make it to 110 then you are well ahead on your bet. The big complaint against annuities is this loss of the capital, because if you had held the same money outside a pension it could be invested in income bearing assets and still leave a capital sum for spending or inheritance.

In recognition of this large disincentive, it is now possible to draw down the fund as an income. In essence this means that you are taking a regular monthly amount out of your pension pot, either dividends or capital. There are some limits applied to this, but it means that you retain control of the capital and any residue goes to your heirs (less a 55% tax charge). You are responsible for the fund and of course the income is not guaranteed.

The paragraphs above simplify the situation in order to describe the general framework. There are many smaller rules and statutory limits around lump sums, annuities, and drawdowns, and these are further complicated by the rules of different pension plans which may impose extra restrictions. There have also been significant changes to pensions rules pretty much every year for the last twenty years, so by the time you retire the situation will be different.

You need to make a decision today about voluntary (as opposed to employer) pension contributions – are today’s tax breaks in a pension plan worth the potential loss of control of your capital on death ? Again, that’s a personal decision for each individual.




fandango_c

1,912 posts

185 months

Friday 12th October 2012
quotequote all
walm said:
^Ha! Log scale - cheeky one.

I think there is plenty of room in a portfolio for precious metals.
But put all your eggs in one hugely volatile basket? - Only for the brave.
Taking logs makes sense for a graph of an asset price.

longone

252 posts

239 months

Saturday 13th October 2012
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Newc said:
Not me guv, just a cut ‘n’ paste from Wikipaedia!

But I read it as there have only been two periods (73-75, 05-12, excluding the artificial squeeze in 81) where holding silver made any sense. Not very compelling.
Why does looking at specific periods in the past help understand what to do today if the current circumstances are so different? Just look at the silver chart through the 2000s, and particularly the impact of increasing money supply in recent years.
This thread was about how to invest in a pension. I am suggesting the days of expecting financial products to perform well are over, for the foreseeable. I am also saying be careful not to be caught in the tax free wrapper trap, it will not, in my opinion, persist.
Silver will go through $50 then $100 in the next year, in my opinion. Like any of us I only know what I've read and learned, and what I believe. Your greatest danger is in applying the good practice of the past and expecting it to still work in the future. I accept I called this a long time ago and so can hardly now loose. But, the secular bull market in PMs is, in my opinion, only starting and is not remotely over.
Keep this thread going, I will be back to remind you of $50 and so on. I will be back if I'm wrong too!
Colin.

ringram

14,700 posts

247 months

Tuesday 29th October 2013
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ringram said:
longone said:

By this time next year I suggest silver will have traded at $100+
Colin.
Sealed for reference smile

I bet you are one of the ones that thinks QE is money printing too...
In which case good luck with things, you will need it.
So how did this bet go? $22/oz nice at present, I see your grasp of economics could best be described as a fail as predicted smile