In chapter one of our retirement series, in which financial journalists offer a personal perspective on their own pension portfolios, Helen Pridham runs through the start of her pension journey.
The advantage of being a personal finance journalist in your 20s and 30s is that you get to know a lot more about the world of finance than most of your contemporaries. You learn about the advantages of saving early for retirement, while your friends eyes glaze over at the very mention of pensions. Not that you do not make mistakes. And your choices are also limited by what is available at the time – and even more so by how much spare cash you have. In the 1970s and 1980s, the options were not as attractive as they are now.
I was 23 when I started working as a financial journalist for a trade publication which was aimed at financial advisers. I was set to work sending out and writing up surveys covering building society, insurance and pension products, so I soon learned quite a lot about them. Coverage of unit trusts and investment trusts was more peripheral.
My own investment horizons were relatively short term, saving for a mortgage and other immediate needs such as holidays. I didn’t have much spare cash to save or invest otherwise. However, I did recognise it would be a wise move to become a member of the company pension scheme. It was a modest, defined contribution scheme (investment-based pension), but I knew my employer would also make a contribution that I would miss out on if I didn’t sign up. I was a member of the scheme for only a couple of years, but I left my contributions invested in it until quite recently and it eventually helped to swell my self-invested personal pension (SIPP).
Limited investment options unlike today
The investment options were limited at the time, unlike today with thousands of funds to choose from that can be held in a SIPP. Back then, three main types of pension policies were available – non-profit, with-profits – which were the most common – and unit linked, with premiums normally invested in insurers’ managed funds.
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When I went freelance in my 30s, I realised that I needed to start my own personal pension plan. There was not the same focus at that time on past performance not being a guide to the future, quite the reverse. The better a company’s past performance, the more business it could attract.
Scottish Widows was doing well in the league tables at the time, so I choose to take out one of its pensions plans. With not much spare money available, it was a rather small policy. It was not such a bad decision, mainly because - started at a time of high interest rates – unbeknownst to me when I took it out, it offered a guaranteed annuity rate (level of income for life) of around 10%. At this unbeatable rate of return, it is the only one of my pensions that I have actually converted to an annuity.
While my Scottish Widows pension was a ‘with profits’ policy, it became increasingly obvious to me – writing about these policies - that a significant part of their returns came in the form of terminal bonuses which were at the discretion of the actuaries. So, my attention turned to unit linked plans. Ironically, I decided to take out a single premium unit linked pension with Equitable Life, no doubt influenced by its ‘no commission’ rhetoric. It didn’t perform particularly well and in later years I switched the proceeds to a SIPP, but I didn’t suffer in the same way as many others who took out ‘with profits’ pensions with the company.
In my 30s I started to diversify
I had also realised that no single company had a monopoly on producing the best returns every year, and that the best investment maxim was (and still is) not to have all your eggs in one basket. Fortunately, in order to improve their results, many unit-linked pension policy providers were starting to link up with external third party investment managers. So, when Clerical Medical teamed up with Fidelity, whose funds were performing very well at the time, I took out a modest regular premium pension with that company too.
However, I was increasingly reluctant to tie up all my spare savings in pensions. While I wanted to save for the long term, retirement seemed a long way off and I knew I could not access these savings.
So, when I did have some spare lump sums in my 30s – as a freelance my earnings were always somewhat unpredictable – I started to diversify. Inflation had been rampant at the beginning of the 1980s so, from time to time, I would buy Index Linked National Savings Certificates. I realised that while other investments may beat inflation, none of them could guarantee to do so in the same way as these Government backed instruments.
These certificates have proved a solid foundation to my retirement savings. I have never cashed them in, opting to roll them over each time they reached maturity. Linked to the retail prices index (RPI), they have protected the value of the ‘cash’ portion of my portfolio over the years, even though the extra interest paid on top of inflation has steadily diminished. And last year the government also changed the goal posts by moving the certificates index linking from RPI to the consumer prices index (CPI), but even this looks attractive when compared with the rates available on most bank or building society savings accounts.
Then along came Personal Equity Plans (PEPs) in the late 1980s as part of Margaret Thatcher’s plan to encourage more people to become shareholders, alongside the cut-price privatisations of British Gas and other utilities. PEPs could be used to invest in unit trusts and helped turn them into mass market products. I started to invest in these plans which I saw as much more flexible than pension plans and just as tax efficient. But by then I had three young children, so I didn’t have too much spare cash.
How I would invest differently today
What I would do differently today, if I was in my 20s and 30s and investing for retirement, would be to set up a SIPP on a platform with a wide range of investment choices.
I would probably focus on holding investment trusts that invest in global shares in my SIPP. I was an early convert to investment trusts. But until 1984 when Foreign & Colonial set up the first investment plan, you could only buy investment trusts via a stockbroker. Their availability within pensions came much later.
I would also invest via ISAs for flexibility (as you cannot withdraw funds from a SIPP until age 55 or age 57 from 2028 onwards). But I would probably have even less money available now than I had when I was actually in my 20s and 30s, as I would presumably be paying off a student loan and having to service much larger mortgage payments. I feel life is a lot harder for younger people today trying to save for retirement.
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