By Alan Steel
To be published in The Scotsman
Saturday 4 February 2012
Research recently carried out by independent publishing group Citywire, highlights reasons why so few of us save as we ought to in investments such as ISAs and Pensions. Confusion is the highest on the list of reasons given. The main causes of that are information overload and lack of perspective.
Take the last 14 years. It's easy to think of loads of reasons why you shouldn't have invested, especially in actively managed funds. That's the message being preached. You can easily come up with lots of excuses for not investing, including Currency Crises, the Stockmarket and Hedge Fund crashes in 1998, the Dotcom bust in 2000, Recessions, 9/11, Sub Prime disasters, Bird Flu scares, Eurozone disasters etc.
And there's "the Lost Decade" for stockmarkets. Don't you know you can't beat an Index Tracker, that Pensions are a waste of time, and it's Property every time? I'm sure you can think of other fairy stories too!
Let's look at a few examples of how patience and knowledge can help investors in the best and worst of times.
Take my cousin who's been so afraid of stockmarkets she's had most her savings in Bank accounts earning less than 0.1%. In 1998 we managed to persuade her she should put £6,000 into a Personal Equity Plan, in Neil Woodford's Invesco Perpetual High Income Fund. Neil's a sensible fellow who's been round the block a few times.
Now if it had been invested in an FT Index Tracker it would be worth today about £7,080. If she'd left it in an average Bank account she would have done better, amassing about £8,000.
But she won a watch by sticking with Woodford - after all charges and taxes the investment today is £19,285, which means it compounded at 9% a year.
So no Lost Decade for her then, and so much for Index Trackers. Needless to say she's delighted. Now she can tweek the funds managed by Woodford and receive a tax-free income of £112 a month. That's quite a bit better than £8 a year interest from the Bank account.
When it comes to Pensions, how many of us have been told they are a waste of space? And yet year after year I remind folks just how attractive they are, especially if you structure them properly with the right investments inside.
A long standing client and good friend is today sadly dying of terminal cancer. The pension fund we helped him build we've long recommended he shouldn't touch for as long as possible. That means no tax-free cash at all before age 75. Because if you die before 75, the entire fund is paid out tax free.
Because he is diagnosed as having less than one year to live, even though he is only five months from age 75, the pension fund has been paid out tax free now, saving his family a seven figure sum in tax. This couldn't have happened had he removed any previous tax-free cash.
This opportunity also applies to Final Salary Scheme members. We're assisting a young man in his mid forties also with terminal cancer, with a wife and young family, and who is in a Final Salary Scheme. Typically, he would die and his family would only receive some life assurance and a miniscule widow's pension, but he too can also have the entire accumulated pension fund paid out tax free
So, two things to remember - always invest with quality active managers. And please recognise the outstanding value Pensions can give you in Good and Bad times.
Article written for publication in The Scotsman
Saturday 4 February 2012