Danger - don't be a pension fund ostrich!

Our clients have been pursuing two broad investment themes over recent months:

1. Going for short term safety and holding pension money in cash or...
2. Pitching some money into emerging markets and going for long term growth.

Both approaches are sensible in current conditions. But according to surveys just released by AXA and Prudential other investors are cutting their pension contributions as their disposable income shrinks in the face of the rising cost of mortgages and the impact of factors such as the soaring price of energy. Suspending or cutting pension contributions will solve nothing, simply defer the problem. The true cost will still have to be paid in the form of a smaller pension or later retirement.

Maintain savings through tough times and you will reap good, long-term dividends by buying units while the markets are low, thus maintaining the benefit of pound cost averaging.

Elsewhere annuity rates are at a four-year peak. Corporate bond yields are high, reflecting the liquidity and confidence problems in the markets at present. The yield spread between gilts and corporate bonds is much wider than would normally be the case.

Does this mean that today is a good time to buy an annuity? Perhaps yes if you are interested in locking into security for the rest of your life. Perhaps no if you are currently invested in equities, looking for equity market recovery and are willing to gamble. For those of you are a few years off from retirement this does demonstrate the need to take control and make sure that as you approach retirement you reduce the risks your investments are exposed to and ensure that you don't need to encash your pension at the bottom of the market.

The government will be introducing new Personal Accounts in 2012. These will be stakeholder pensions mark II; simple, low cost, limited choice. There will be a default funding rate of 8% comprising 4% from the individual, 3% from your employer and 1% from the government in the form of tax relief. There are several points to consider here. One is that I believe the defined contribution pension world will coalesce into two camps. The first - those who care about their pensions and are willing to take an interest in their savings - will choose SIPPs (self invested personal pensions). Others will open Personal Accounts, simply throw some money at the problem and hope for the best.

If you are contributing to a stakeholder or personal pension then this may be a good moment to look at what you want from your pension. Do you want to be a pensions ostrich hiding from the problem or do you want to take control of the problem? If your instinct is to tackle the problem then I believe you should look at a SIPP.

Finally, there is the fact that pension funding is about to become a reality for all. Even if you, dear reader, are already paying into your pension at a creditable rate, is your spouse? Are your children? If not then it is time to take control.

Tom McPhail
Head of Pensions Research