Would you really take your pension cash and run the fund yourself?

As from April 2015, those in the UK will have the option of taking full control of their own pension fund which is a fantastic freedom from the shackles of the insurance companies that up to now have controlled almost all pensions investments.

Although there are many people who invest their own private pensions just as they do with their ISAs, there is also the option of transferring one’s company scheme and investing that too. That’s a much bigger deal as one’s company pension is often much more substantial than one’s ISA although, up to now, that was not terribly relevant as you couldn’t take full control of it.

How much more substantial? Well, I recently calculated roughly how much it might be for a colleague and the numbers were quite staggering. Taking a simple example of someone who’d worked 40 years for this employer, earning £40,000 per year, the total value was aroud £450,000. More interesting, the pension that the employer was paying on that equated to around 4.75% (say £22,000).

So, in principle, if he were to take the £450,000 and could get 4.75% or more from the investments, he would do better than his company scheme. However, that’s not the full story. When he died the £22,000 would be reduced to £11,000 for his widow and when she died, the payments would stop. If he took the £450,000 and invested it himself, the pension income wouldn’t reduce when he died and in due course his kids would get to keep the £450,000 (or whatever it was then worth).

It looks like a better deal, and the only question is: would many people actually do that? Although it may seem crazy not to, the amounts of money involved are quite scary, after all you’re getting to manage an investment fund more than 10 times your salary and that’s probably a good deal more than most people are used to dealing with.

One way to get the confidence that you’d need to take the money is to run a dummy portfolio over the 5 or 10 years preceeding your retirement which should give you an idea of how well (or badly) you would be running the investments. That way, when the day comes, you’ll know whether or not you could do it. Whether you’d have the confidence to take the money and run it is, of course, quite another matter.

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