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pensions are investments

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You shouldn’t take financial advice from a Baptist minister.

I was listening to Radio 4’s Thought for the Day earlier on, where a Baptist minister was talking about the sensible, risk averse people having to bail out the more foolish, risk takers. Bail outs are not universally popular, but one thing in particular that he said stuck out to me. He said that he has his whole fortune safely in a building society.

are building societies safe?

Of course, you’ll all be aware that building societies are not intrinsically safe. Your money is only as safe as either the institution you’ve put the money in, or if that fails, the extent to which it’s guaranteed by a government scheme such as the Financial Services Compensation Scheme.

When you hold money in a building society, you hold it in cash, and cash has its own risks. There’s the risk of inflation eating away at your money, and the opportunity cost - the chance that you could have done better with your money elsewhere.

do you have money elsewhere that you forget about?

I suspect that the Baptist minister in question doesn’t have his whole fortune safely in a building society. I can’t be certain but it’s likely that he expects to enjoy a ministers’ pension when he retires, he’s probably contributing to one right now.

what do pensions have to do with anything?

Well, work and personal pensions are part of your fortune. Especially if you are planning on retiring one day on more than the state pension. Final salary pensions are much sought after, because they offer great benefits to retirees. But those benefits need to be paid for.

You might think that if you have a final salary pension, it comes with some sort of cast iron guarantee. But it doesn’t. There’s only one place that the money that you pay in can grow into enough to pay out, and that’s in investments. Regardless of the type of pension that you have, there’s no secret money cupboard.

If you have a final salary pension, then the trustees and the scheme actuaries decide where how the money should be invested - usually in stocks, bonds, cash and property - and try to ensure that there will be enough money to cover everyone’s pension. That’s why a lot of schemes are asking members to contribute more, for the same or lower pension when they retire. If they don’t, there isn’t going to be enough money to pay everyone’s pension, because money doesn’t grow on trees.

If you work in the public sector, the taxpayer could be forced to pick up the tab if there’s a shortfall, but don’t count on everyone else voting for that.

If you have a money purchase or defined contribution pension, then you can directly control your investments. You should take the opportunity to learn about risk and investing, but there’s probably a default set-up that is at least vaguely appropriate.

maybe I shouldn’t invest?

There is always the risk that your pension might not be worth as much as you hope, but it’llĀ  be better than nothing, and it’s very likely to be better than just sticking the money in a building society, as there are tax breaks, (and often employer contributions) for using a pension wrapper.

Nearly everyone is invested in risky things and it’ll probably turn out ok. In the long run. Don’t use the current economic climate as an excuse for delaying your investing.

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8 comments for “pensions are investments”

  1. Absolutely agree all investments have some risk. Just this week I read in the Telegraph that building society PIBS from the Bradford and Bingley - seemingly super-safe bonds - are not paying up now.

    These were touted to older people as secure investments and an alternative to Gilts. Unfortunate for those who put too much in them!

    Posted by Monevator | May 30, 2009, 8:37 am
  2. unfortunely there is no safe investment anymore. there are plenty of places to invest but as i have learned since retiring it is that some risk is just a fact of life and there are no guarantees and you have to do your home work and not rely on others to look out for your best interests. i fired my broker jan 2008 after he had recommended investing in equities wish i had sold them also my investment in equities is now worth 48% of what i had. luckly i had money elsewhere but all told total loss was about 31% almost impossible to replace now in this market. i’ve cut costs to the bone but will fall short of my goal by well over 150k. i’ll never believe the hype again but it may well be too late for me and in this economy who’s going to hire me and pay a decent wage???

    Posted by jimmy | June 1, 2009, 3:03 am
  3. Investments are, by nature, insecure. Regular bank or savings accts are more secure than any other type of investment scheme, but the percentage gained is no where near as good. Investing is risky, but the gains can be astronomical, if well played.

    The important thing with regular accts is not to use the overdraft, especially not if you’re a Barclays customer! (see http://money.sky.com/mp/features/news/2009/05/30/Barclays-hikes-overdraft-rates.html)

    Posted by Chris.roland | June 1, 2009, 9:25 am
  4. I think that people are waking up to the fact that all investments can fail. Look at what happened with 401k’s. Even though they’re tied into stocks, most people never really thought anything could happen b/c 401k’s were “sure things.”

    Posted by CD Rates Guy | June 9, 2009, 7:27 pm
  5. Okay sure people got burnt a little by their 401K failings but honestly if you thought about it before hand how could you not be surprised now? Investments should be built upon strong principles such as governments and growing businesses (i.e. Oil atm or green wings of the economy, or people that make cloth bags…). And sure occasionally governmental systems fail cough* Iceland, but generally bad times will be followed by good times. In Canada we have Guaranteed Investment Certificate’s which are guaranteed up to 100000$ should your bank fail or what not. The only way you could lose your money is if the government failed and couldn’t pay you out.
    While that’s a possibility, of course (less now then it was say 4 months ago), should we also be building a missile shield against cosmic rocks hurtling towards us at 10km/sec? It’s also a possibility, but we shouldn’t be worried about it.


    Posted by Push Lawn Mower | June 10, 2009, 12:19 am
  6. Risk is everywhere if we walking on road there is also risk so meaning risk is ever place in every investments, but always invest in safe investment is beneficial like if we invest in stock market its highly risky if we invest in government bond or funds its very very low risk

    Posted by Healthcare Management | July 17, 2009, 12:21 pm

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