Your Pension Plan

Now, a while ago we were talking about long run equity returns. Lets see how that effects you, your pension, and come to think about it, most of the personal finance industry. You see, you've been sold a lie. Eh?

The FSA mandate projected returns of 5%, 7% and 9% on non-taxed (Pension) assets. Now I say long run returns are 5-6%, before fees. Fees amount to around 1%, so lets call that 4.5% return. Hmm, thats lower than the lowest FSA projection, and they assum a mix of assets to include bonds, which would bring my number down to say 4% pa.

But even that's not the whole story, what about inflation. Well, inflation erodes the purchasing power of your investments. The FSA allow projections in nominal terms, so a £xxx fund becomes £xxx after n years and looks big, whereas infact you dont even care about that, you care what these numbers look like in todays equivalent money. Thats fiat money combined with an expansionary money policy for you (we'd better leave that debate for another time, otherwise we'll be here all day!). So, my 4% return pa after inflation of, say 2% (BOE's mandate) now becomes 2% (ooops, we need to have an inflation discussion as well. Did you know that the US currently has published cnsumer price inflation of 2%, but if it were using the definition of CPI from President Clintons era it would be more like 8%(check)!!! Holy xxx).

So, there we have it, I get 2%, while the FSA gets 5-9%. So, what does this mean to you. Lets say you want a pension of £20,000 in 20-years time, well they say you need £26,000 in your fund, while I say you need £67,000 ... gulp.

So, next time you are with your financial adviser ask him about this.