Pension or Mortgage
- Thread starter DenisP
- Start date
If you are a higher rate tax payer then you are automatically getting a decent 41% tax relief on pension contributions. This more than outweighs any cost saving on paying off the mortgage early.
Remember that any money put into a pension will grow tax free, so even if you avoided managed funds etc and invested your pension monies in a Gilt fund, the interest you would get on the government bonds would benefit from compound interest up until retirement.
In my opinion avoid managed/equity funds as no one knows when they will recover, avoid cash funds as return is small and invest the money in a pension gilt fund where you will recieve interest on the investment and benefit greatly from the tax relief.
Regards
Stephen
Gilt funds are government bonds which pay fixed interest. All the pension companies to the best of my knowledge offer them. Pretty much every managed fund has some percentage of the fund invested in gilts. Long term equities have outperformed gilts as an asset class in the past but the way the markets are at the moment in my view equities are too risky as no one can predict what way the market will go. Past performance is not to be treated as an indicator of future performance etc etc.
Boots (the pharmacy chain) pension fund is only invested in Gilts and they have been totally insulated by the current equities crash. Some other pension funds have taken the same approach as they are a low risk asset.
It depends on your risk adversity, if you are a gambler by all means invest in equities but for every winner there is a loser (just as Quinn found out with his investment in Anglo). If you just want a low risk approach with an almost guaranteed return then Gilts are the way to go at the moment.
Your initial question was pension vs mortgage early repayment, I can only stress that the pension option is better and leave the decision on what asset class you wish to invest in to yourself as you know better your risk adversity better than anyone.
Have a good christmas
Stephen
Boots (the pharmacy chain) pension fund is only invested in Gilts and they have been totally insulated by the current equities crash. Some other pension funds have taken the same approach as they are a low risk asset.
It depends on your risk adversity, if you are a gambler by all means invest in equities but for every winner there is a loser (just as Quinn found out with his investment in Anglo). If you just want a low risk approach with an almost guaranteed return then Gilts are the way to go at the moment.
Your initial question was pension vs mortgage early repayment, I can only stress that the pension option is better and leave the decision on what asset class you wish to invest in to yourself as you know better your risk adversity better than anyone.
Have a good christmas
Stephen
[FONT="]The economist JK Galbraith said; “we have two classes of forecasters; those who don’t know and those who don’t know that they don’t know”.[/FONT][FONT="][/FONT]
[FONT="]
Boots is a bad example to give in this instance. They had to match their assets to their liabilities in a defined benefit pension fund. The company took a decision to manage the risk of the future liability. They wanted to gain certainty over the size of the future liability. The alternative was potentially to break the promise given to the employees of a defined pension in retirement. [/FONT]
[FONT="] [/FONT]
[FONT="]This is not the same as a private investor investing in a defined contribution scheme over the long term. An investor with 20 or 30 years to go to retirement needs to ensure that their expected investment returns meet their objective. Typically this is to build a sufficiently large fund during their working life to ensure adequate income in retirement. To help them achieve this an investor needs to make the best use of the money saved, and that means getting the best investment returns, not trying to manage short-term variations.
[/FONT]
[FONT="]
[/FONT]
[FONT="]Over the long term the highest expected returns are from equities and therefore a long-term investor should not be jumping in and out of the markets. Attempting to time entry and exit from the markets is generally a profitless exercise.
I agree that your choice of how to invest your pension does depend partially on your adversity to risk. However, this adversity is itself often a factor of your age . It has nothing to do with "the way the markets are at the moment" [/FONT]
[FONT="] [/FONT]
[FONT="]Around the world, there are many examples of individuals being mis-sold products which did not fit their risk profile. The benefits of getting risk and reward right however are also significant; from the investor’s perspective there is the opportunity to avoid unwanted investment experiences which are either too risky, or indeed what the Sandler Review1 called “reckless conservatism” where many consumers adopt ‘low risk’ investment strategies at the expense of significant opportunity costs.[/FONT]
[FONT="] [/FONT]
[FONT="]The degree of risk an investor is willing to take on is the single most important driver of return within an asset allocation framework.[/FONT]
[FONT="] [/FONT]
[FONT="]Right now, tolerance for risk is at extremely low ebb, a development reflected in the fact that yields on risk-free assets are at historic lows—in the case of US Treasury bills at levels not seen since World War II.[/FONT]
[FONT="] [/FONT]
[FONT="]Yet this risk-averse behaviour masks one of the paradoxes of investment.[/FONT]
[FONT="] [/FONT]
[FONT="]In good economic times, when comfort levels are high, the expected return from risk assets is less favourable. In those times, the cost of our willingness to take a risk is a lower expected return.[/FONT]
[FONT="] [/FONT]
[FONT="]Correspondingly, in tough economic times, when risk aversion rises, the expected return from risk assets goes up. In these times, the cost of our reluctance to take risks is not capturing the higher expected returns on offer.[/FONT]
[FONT="] [/FONT]
[FONT="]So those now harbouring the bulk of their portfolios in Treasury bills, cash-like instruments or sovereign bonds are forgoing the opportunity to get the full benefit of the bounce in risk assets when it comes.[/FONT]
[FONT="]
Investing in the stockmarket over the long term is not gambling and it certainly doesn't have to be a "zero sum game". The reference to Quinn and by implication CFDs displays a lack of understanding of equity markets. Buying and holding global portfolio of shares is not the same as buying a CFD.
I agree that Speculation is a zero sum game. Speculation is simply betting and in any form of betting, for every long there is a short and therefore for every winner there has to be a loser. Once costs are taken into account the expected return from speculation is zero less your costs.
Investment is about matching risk and reward. The higher the risk the higher the expected reward.
Gilts are lower risk and therefore have a lower expected return. However, even here there is a risk reward trade off to consider.[/FONT]
[FONT="][/FONT] [FONT="]
[/FONT]
[FONT="]Two factors explain the majority of returns from a fixed interest portfolio. The quality factor describes how low-grade obligations have higher expected returns than high-grade obligations. That is to say high yield bonds (junk bonds) are more risky than investment grade corporate bonds which are more risky than soverign debt (gilts)[/FONT]
[FONT="]
[/FONT]
[FONT="] The term factor describes how long-term bonds have higher expected returns than short-term bonds. However, these premiums have not been large enough historically to reward the additional risk.
[/FONT]
[FONT="][/FONT]
[FONT="]Yet, what do we see being issued to the unsuspecting public in spadefulls right now? Long-Term Government Bond funds...........[/FONT]
[FONT="]
The expected future return is higher for equities because equities carry more risk than Gilts.
This is not gambling and it is not speculation it is simply how markets work.
[/FONT]
[FONT="]All investors need to ensure that they get the bigger strategy issues sorted out before they embark on investing in any potentially higher returning “real” asset classes.[/FONT]
[FONT="] [/FONT]
[FONT="]Most importantly, long-term (10 or 20 years) pension investors should want to embrace some risk in their investments, because it implies higher expected returns in the future. [/FONT]
[FONT="] [/FONT]
[FONT="]Management of risk is not the same as elimination of risk, and does not mean that losses will not be made along the way (because some losses are bound to occur– profitable investing is a process that takes time to deliver). [/FONT]
[FONT="] [/FONT][FONT="][/FONT]
[FONT="]We all appreciate that no one can predict the future on a consistent basis, and therefore a rational investor should aim to position their portfolio so that no matter what happens in the future, their finances have the best opportunity of meeting their financial objectives.[/FONT][FONT="][/FONT]
[FONT="]
[/FONT][FONT="]So where does this leave equities? The Efficient Markets Hypothesis states that capital markets work and diversification between asset classes increases return and reduces risk. [/FONT]
[FONT="] [/FONT]
[FONT="]Over the long run, markets reward investors with positive returns for taking risks and providing capital. If they did not, the capitalist system would have collapsed long ago. Prices reflect the knowledge and expectations of all investors at any given time. Capital markets are an efficient means of allocating capital: that is why it is called “capitalism”.[/FONT]
[FONT="]
[/FONT][FONT="]Pension investors should therefore adopt a highly diversified, multi-asset class investment approach which allows for the creation of investment portfolios of largely un-correlated assets.
[/FONT]
[FONT="][/FONT]
[FONT="]These serve to reduce risk of capital losses. If your current pension plan does not offer a wide range of asset classes: Global Equity, Smaller companies, Value Equities, Emerging Markets, Property, Real Estate Investment Trusts, Global Bonds, Alternative Investments: Commodities, Precious Metals, etc etc. Then maybe you should consider changing your pension provider. [/FONT]
[FONT="] [/FONT]
[FONT="]However, avoid the temptation to try and guess the markets, jumping in and out of Gilt funds just means you are more likely to miss the bounce when it comes. Do not undertake tactical asset allocation, market timing or stock-picking. Become an investor not a speculator.[/FONT]
[FONT="] [/FONT]
[FONT="]For individual advice please private message me. A Fee is payable - no commissions taken.[/FONT]
[FONT="][/FONT]
[FONT="]Marc Westlake Dip PFS, QFA[/FONT]
[FONT="]
[/FONT]
[FONT="] [/FONT][FONT="]1 “Medium and Long-Term Retail Savings in the UK”, Sandler Review, July 2002[/FONT]
[FONT="]
[/FONT]
[FONT="][/FONT]
[FONT="]
Boots is a bad example to give in this instance. They had to match their assets to their liabilities in a defined benefit pension fund. The company took a decision to manage the risk of the future liability. They wanted to gain certainty over the size of the future liability. The alternative was potentially to break the promise given to the employees of a defined pension in retirement. [/FONT]
[FONT="] [/FONT]
[FONT="]This is not the same as a private investor investing in a defined contribution scheme over the long term. An investor with 20 or 30 years to go to retirement needs to ensure that their expected investment returns meet their objective. Typically this is to build a sufficiently large fund during their working life to ensure adequate income in retirement. To help them achieve this an investor needs to make the best use of the money saved, and that means getting the best investment returns, not trying to manage short-term variations.
[/FONT]
[FONT="]
[/FONT]
[FONT="]Over the long term the highest expected returns are from equities and therefore a long-term investor should not be jumping in and out of the markets. Attempting to time entry and exit from the markets is generally a profitless exercise.
I agree that your choice of how to invest your pension does depend partially on your adversity to risk. However, this adversity is itself often a factor of your age . It has nothing to do with "the way the markets are at the moment" [/FONT]
[FONT="] [/FONT]
[FONT="]Around the world, there are many examples of individuals being mis-sold products which did not fit their risk profile. The benefits of getting risk and reward right however are also significant; from the investor’s perspective there is the opportunity to avoid unwanted investment experiences which are either too risky, or indeed what the Sandler Review1 called “reckless conservatism” where many consumers adopt ‘low risk’ investment strategies at the expense of significant opportunity costs.[/FONT]
[FONT="] [/FONT]
[FONT="]The degree of risk an investor is willing to take on is the single most important driver of return within an asset allocation framework.[/FONT]
[FONT="] [/FONT]
[FONT="]Right now, tolerance for risk is at extremely low ebb, a development reflected in the fact that yields on risk-free assets are at historic lows—in the case of US Treasury bills at levels not seen since World War II.[/FONT]
[FONT="] [/FONT]
[FONT="]Yet this risk-averse behaviour masks one of the paradoxes of investment.[/FONT]
[FONT="] [/FONT]
[FONT="]In good economic times, when comfort levels are high, the expected return from risk assets is less favourable. In those times, the cost of our willingness to take a risk is a lower expected return.[/FONT]
[FONT="] [/FONT]
[FONT="]Correspondingly, in tough economic times, when risk aversion rises, the expected return from risk assets goes up. In these times, the cost of our reluctance to take risks is not capturing the higher expected returns on offer.[/FONT]
[FONT="] [/FONT]
[FONT="]So those now harbouring the bulk of their portfolios in Treasury bills, cash-like instruments or sovereign bonds are forgoing the opportunity to get the full benefit of the bounce in risk assets when it comes.[/FONT]
[FONT="]
Investing in the stockmarket over the long term is not gambling and it certainly doesn't have to be a "zero sum game". The reference to Quinn and by implication CFDs displays a lack of understanding of equity markets. Buying and holding global portfolio of shares is not the same as buying a CFD.
I agree that Speculation is a zero sum game. Speculation is simply betting and in any form of betting, for every long there is a short and therefore for every winner there has to be a loser. Once costs are taken into account the expected return from speculation is zero less your costs.
Investment is about matching risk and reward. The higher the risk the higher the expected reward.
Gilts are lower risk and therefore have a lower expected return. However, even here there is a risk reward trade off to consider.[/FONT]
[FONT="][/FONT] [FONT="]
[/FONT]
[FONT="]Two factors explain the majority of returns from a fixed interest portfolio. The quality factor describes how low-grade obligations have higher expected returns than high-grade obligations. That is to say high yield bonds (junk bonds) are more risky than investment grade corporate bonds which are more risky than soverign debt (gilts)[/FONT]
[FONT="]
[/FONT]
[FONT="] The term factor describes how long-term bonds have higher expected returns than short-term bonds. However, these premiums have not been large enough historically to reward the additional risk.
[/FONT]
[FONT="][/FONT]
[FONT="]Yet, what do we see being issued to the unsuspecting public in spadefulls right now? Long-Term Government Bond funds...........[/FONT]
[FONT="]
The expected future return is higher for equities because equities carry more risk than Gilts.
This is not gambling and it is not speculation it is simply how markets work.
[/FONT]
[FONT="]All investors need to ensure that they get the bigger strategy issues sorted out before they embark on investing in any potentially higher returning “real” asset classes.[/FONT]
[FONT="] [/FONT]
[FONT="]Most importantly, long-term (10 or 20 years) pension investors should want to embrace some risk in their investments, because it implies higher expected returns in the future. [/FONT]
[FONT="] [/FONT]
[FONT="]Management of risk is not the same as elimination of risk, and does not mean that losses will not be made along the way (because some losses are bound to occur– profitable investing is a process that takes time to deliver). [/FONT]
[FONT="] [/FONT][FONT="][/FONT]
[FONT="]We all appreciate that no one can predict the future on a consistent basis, and therefore a rational investor should aim to position their portfolio so that no matter what happens in the future, their finances have the best opportunity of meeting their financial objectives.[/FONT][FONT="][/FONT]
[FONT="]
[/FONT][FONT="]So where does this leave equities? The Efficient Markets Hypothesis states that capital markets work and diversification between asset classes increases return and reduces risk. [/FONT]
[FONT="] [/FONT]
[FONT="]Over the long run, markets reward investors with positive returns for taking risks and providing capital. If they did not, the capitalist system would have collapsed long ago. Prices reflect the knowledge and expectations of all investors at any given time. Capital markets are an efficient means of allocating capital: that is why it is called “capitalism”.[/FONT]
[FONT="]
[/FONT][FONT="]Pension investors should therefore adopt a highly diversified, multi-asset class investment approach which allows for the creation of investment portfolios of largely un-correlated assets.
[/FONT]
[FONT="][/FONT]
[FONT="]These serve to reduce risk of capital losses. If your current pension plan does not offer a wide range of asset classes: Global Equity, Smaller companies, Value Equities, Emerging Markets, Property, Real Estate Investment Trusts, Global Bonds, Alternative Investments: Commodities, Precious Metals, etc etc. Then maybe you should consider changing your pension provider. [/FONT]
[FONT="] [/FONT]
[FONT="]However, avoid the temptation to try and guess the markets, jumping in and out of Gilt funds just means you are more likely to miss the bounce when it comes. Do not undertake tactical asset allocation, market timing or stock-picking. Become an investor not a speculator.[/FONT]
[FONT="] [/FONT]
[FONT="]For individual advice please private message me. A Fee is payable - no commissions taken.[/FONT]
[FONT="][/FONT]
[FONT="]Marc Westlake Dip PFS, QFA[/FONT]
[FONT="]
[/FONT]
[FONT="] [/FONT][FONT="]1 “Medium and Long-Term Retail Savings in the UK”, Sandler Review, July 2002[/FONT]
[FONT="]
[/FONT]
[FONT="][/FONT]
With respect to your views I disagree Marc.
The capitalist market is in meltdown and major financial institutions are looking to governments for bailouts on an unprecedented scale. Wall Street will never be the same as it was, Investment banks as they were traditionally known will no longer cease to exist.
There is a good reason why all investment products carry the catchline "past performance is not an indicator of future performance". Just because equities have outperformed every other asset class historically is no guarantee that this will continue to be the case going forward.
The reference to Boots was to illustrate the benefit of security that can be obtained, the fact they operate a defined benefit scheme is neither here nor there. Ask anyone coming to retirement age now who needs to purchase an annuity and they would have happily been in gilts rather than equities. By the way looking at the latest Moneymate figures, the best Gilt fund annualised return over 10 years was 5.6%, the best managed fund annualised return over 10 years was 2.6%.
Risk matching return means there is a chance of greater rewards but not every customer wants to risk their pension fund. The main attraction of pension schemes is the tax relief in my opinion. Investing in Gilts secures this relief, investing in equities does not necessarily.
I am not advocating staying out of the equity market forever, I just believe that things will get worse before they get better. For customers already investing in equities I share your view that changing would miss the bounce, but for those who have lost nothing I do not see the point of putting their money at risk. You are obviously less risk adverse than I though.
Stephen Cowan QFA FLIA Dip SI
The capitalist market is in meltdown and major financial institutions are looking to governments for bailouts on an unprecedented scale. Wall Street will never be the same as it was, Investment banks as they were traditionally known will no longer cease to exist.
There is a good reason why all investment products carry the catchline "past performance is not an indicator of future performance". Just because equities have outperformed every other asset class historically is no guarantee that this will continue to be the case going forward.
The reference to Boots was to illustrate the benefit of security that can be obtained, the fact they operate a defined benefit scheme is neither here nor there. Ask anyone coming to retirement age now who needs to purchase an annuity and they would have happily been in gilts rather than equities. By the way looking at the latest Moneymate figures, the best Gilt fund annualised return over 10 years was 5.6%, the best managed fund annualised return over 10 years was 2.6%.
Risk matching return means there is a chance of greater rewards but not every customer wants to risk their pension fund. The main attraction of pension schemes is the tax relief in my opinion. Investing in Gilts secures this relief, investing in equities does not necessarily.
I am not advocating staying out of the equity market forever, I just believe that things will get worse before they get better. For customers already investing in equities I share your view that changing would miss the bounce, but for those who have lost nothing I do not see the point of putting their money at risk. You are obviously less risk adverse than I though.
Stephen Cowan QFA FLIA Dip SI
I'd like to come back to some of these points in the New Year - and for the avoidance of doubt I'm not recommending a managed fund either. In 2007 the average Irish Manged Pension Fund had an allocation of at least 20% to Irish Equities. At the end of September the Irish market made up just 0.22% of the MSCI World Index.
As a parting question? How many people do you think were talking about investing in British Company shares at the end of 1944? Or for that matter German companies or Japanese?
The same was true in the USA in the early 1930s following the Wall Street Crash. That's it game over, no way this will ever turn around.
Even in the 1970s, Journalists confidently announced the "death of equities".
I agree that over a short period of time it is dangerous to infer any meaningful statistics. Indeed to have a meaningful "T" statistic you need about 60 years of data.
Fortunately I have data going back to 1926 in the USA and the excellent Barclays Gilt and Equities study goes back to the turn of the last Century.
When looking over terms of 20 years or more equities are mean reverting. The long term equity risk premium around the world has consistently averaged about 4% above a risk free rate (Gilts, T Bills etc). I accept that the 6% premium seen for much of the 80s and 90s was excessive and we have paid the price in the last year.
So, our expected return from equities over the long term (on average) is about 4% above Fixed Interest. For the last decade, we seem to have experience a mean reversion back to the longer term 4% average, and in effect equities have moved sideways.
Consequently, the rational expectation is that over the long term the return on equities will once more be positive. It is simply the compensation that an investor demands and requires for taking the risk of investing.
The world has changed recently. I agree. Somehow, it is difficult to see how we can ever continue and that we are facing special challenges. Not at all, the world is always changing and capitalism is always facing challenges just like it did in 1900, 1929,1945, 1971, 1975, 1979,1986, 2001, 2008 and it will change again in the future.
Merry Christmas to all and a Happy New Year to all.
As a parting question? How many people do you think were talking about investing in British Company shares at the end of 1944? Or for that matter German companies or Japanese?
The same was true in the USA in the early 1930s following the Wall Street Crash. That's it game over, no way this will ever turn around.
Even in the 1970s, Journalists confidently announced the "death of equities".
I agree that over a short period of time it is dangerous to infer any meaningful statistics. Indeed to have a meaningful "T" statistic you need about 60 years of data.
Fortunately I have data going back to 1926 in the USA and the excellent Barclays Gilt and Equities study goes back to the turn of the last Century.
When looking over terms of 20 years or more equities are mean reverting. The long term equity risk premium around the world has consistently averaged about 4% above a risk free rate (Gilts, T Bills etc). I accept that the 6% premium seen for much of the 80s and 90s was excessive and we have paid the price in the last year.
So, our expected return from equities over the long term (on average) is about 4% above Fixed Interest. For the last decade, we seem to have experience a mean reversion back to the longer term 4% average, and in effect equities have moved sideways.
Consequently, the rational expectation is that over the long term the return on equities will once more be positive. It is simply the compensation that an investor demands and requires for taking the risk of investing.
The world has changed recently. I agree. Somehow, it is difficult to see how we can ever continue and that we are facing special challenges. Not at all, the world is always changing and capitalism is always facing challenges just like it did in 1900, 1929,1945, 1971, 1975, 1979,1986, 2001, 2008 and it will change again in the future.
Merry Christmas to all and a Happy New Year to all.
LDFerguson
Registered User
- Messages
- 4,663
I love the way the signatures got longer with each post. 
Liam D. Ferguson C.U. n 2009
Liam D. Ferguson C.U. n 2009
I love the way the signatures got longer with each post.
Liam D. Ferguson C.U. n 2009
Aye Liam
One key piece of information we both lack (aside from attitude to risk) is how long Denis has to go to retirement. If its 10 years plus then Marcs argument is strong, if its less then in my opinion my argument is stronger. The initial question was pension contribution vs mortgage repayment, I think we both agree that pension contributions are the way to go.
Happy christmas Marc and Liam and best of luck with whichever advice you go for DenisP.
C U all in 2009.
Stephen
ps for all the letters it just shows like in serious medical situations its always worth getting a second opinion.