“God Laughs When People Invest For the Long Term” Woody Allen (maybe)
Conventional wisdom explains that the best time to plan a tree was twenty years ago. The second best time is today.
Investing for your pension is best done long before the funds will be needed.
Pensions for children were introduced quite a while back and we are forced by law to make payments into a pension scheme – called Auto Enrolment if we are working.
Investing in any form of stock market type of investment is best done early in order to take advantage of ‘compounding’ which is the process of your money working hard for you – interest on interest. Which of course only really works properly if you are investing for income. Many pension funds do not.
The pension industry will always tell you that you should invest as much as you can as soon as you can for this reason or that.
All of which sound plausible.
Problem for you, the longer you are invested the more charges are deducted from your pension and the less access you have to your money over a lifetime.
Money tied away in pensions can’t be used by you during your lifetime, or at least until you are 55 – and this is always subject to change.
And every change of Government in the last forty years has made some changes to pension rules – I expect this will continue.
Given that any funds paid in can’t be accessed until you are well over middle age we have to ask the question what is the best use of your money.
If you are under thirty, then perhaps it could be used to repay debt. Consumer credit cards are often charged at over 20% interest.
Possibly reduction in Student loan given that these are charged at 6% or more.
To use as a deposit for a first home, to save having to fund the cost of rent. Given that rental yields for a landlord are often over 4% – and the cost of borrowing less than 1.5% for many mortgages this makes sound financial sense.
You could redirect from pensions to invest via an Individual Savings Account that offers a cash and investment option and with potentially lower charges (be careful of today’s low interest rates on cash – but also be aware that cash is completely flexible).
Given lifestyle changes in your twenties and thirties having more flexible investments makes sense. With cash you seize the opportunity to invest in a business, take a punt on Crypto (a very small one), have funds to cover wedding costs, overseas travel for the dream job, to cover the costs of maternity/paternity.
Modern lives are very different five or even ten years ago. Pensions are something that was designed in the 1970’s for very different times. With modern planning and little knowledge you could be using your money to aid your short and medium term future.
Life expectancy when major changes to pensions were made (1980’s) were 67 for men and 69 for women, working lives were also shorter, with peak earnings earlier.
This is something the industry has failed to factor in – which is why all you hear is ‘pay in earlier’ of course the pensions firms would tell you that – they earn their fee income based on how much you have in and more importantly how long for – annual charges!
Also, if you have done the maths in relation to pension you’ll start to understand that the whole tax efficiency thing makes a little sense, but the lack of flexibility indicates to me that other options make more sense.
Using up other allowances and making the most of all tax free allowances first will work well for you, like all things doing what you are told does not always make sense. And I absolutely assure you that you will need your money, or some of it long before you get to retirement.
Interested in having me and the team come to do a presentation or host a workshop at your place of work – get in touch below. More information on this link Money Workshops
Money and Mindset days cover all of this and more.
Link is below.