Why shouldn’t I just invest my pension money in cash?
You might be thinking, do I really have to bother running an investment portfolio? Why isn’t it an option simply to put my newly amalgamated pension pot into a bank account and let it sit there?
It’s true that just keeping all your money in cash, which will pay interest and involve no risk to your capital, is in theory an option. In fact, it would have been a perfectly viable approach in the past – and may indeed become viable again in the future.
But at the moment, with interest rates at record lows, it is not a realistic option unless you have very large sums at your disposal, or if you are so risk-averse that you are prepared to sacrifice a great deal of the income you might otherwise make from a different approach.
To illustrate the extent of the problem, consider a £300,000 pension pot held purely in a cash account. At the time of writing (May 2019), the highest interest rate you can obtain on this cash is about 2.2%. (For up to date rates visit www.investmentsense.co.uk/accounts-for-pensions.)
This rate is available from a special kind of savings account for holding cash within a pension plan. This special type of cash account is needed because pensions have a particular legal status that means the money in them cannot be put into ordinary bank accounts.
With that interest rate of 2.2%, you would earn an income of £6,600 a year. Even with the state pension on top, that is probably not enough for you to live on. And while your capital would appear to remain intact at £300,000 from year to year, it would actually be eroded all the time by inflation. In fact, the current rate of inflation only slightly less than the 2.2% return the account offers on the cash.
Our suggested portfolios, by contrast, aim to produce larger incomes than you will get from cash savings accounts. One of the portfolios targets an income of 5%, which would equate to £15,000 on a £300,000 pot. The portfolios may, if markets are favourable, provide capital growth as well.
<< Return to: Step 3: What to invest your pension in
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