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Advisers hit back at claim that cash beats pensions

Advisers have slammed claims that many defined-contribution pension scheme members would have been better off saving in a cash account in light of recent stockmarket turmoil.

Research by PricewaterhouseCoopers, shows a 50 year-old paying 5 per cent of his salary for the past 10 years would have a current fund value of around £21,000 despite contributing a total of £24,000, an annual loss of around 3 per cent.

Partner and chief actuary Raj Mody says: “This situation leaves members of DC schemes, who now outnumber members of defined-benefit schemes, with some fiendish challenges. Individuals need to strike a balance between investing in riskier assets which may or may not deliver a higher pension versus choosing lower-risk and lower-return investments but having to contribute much more to secure an adequate income in retirement.”

But FSC Investment Services managing director Frank Cochran says: “Hindsight is a wonderful thing. In two or three years time when unit values increase, PwC will be eating their words. Any good IFA will have been switching their clients into safer funds in the run-up to retirement anyway. To deny people the opportunity of high returns by putting them into cash, which is delivering 1.5 per cent at the moment, is ludicrous.”

Financial Management Group director Alister Meller says: “With a pension, you get tax relief, National Insurance rebates and 25 per cent tax-free cash. It is a long-term investment and at the moment cash is giving you a return close to zero.”

Syndaxi Chartered Financial Planners managing director Robert Reid says DC schemes managed by quality IFAs would have fared better.

He says: “The big problem is that schemes have been put in place by benefit consultants who have never looked back. DC schemes that have had decent IFAs involved would have had a much better return. But the big boys do not review the asset allocation or fund choice. There is not enough money being put in and the default fund used by consultants is a managed fund, where getting the asset allocation right is as likely as winning the euro millions.”

The survey claims a 55 year-old paying 10 per cent of her salary for the past 20 years would have invested a total of £94,000 in contributions and her current pension pot would be worth £130,000, an average annual growth rate of under 4 per cent a year, less than a cash investment over the period.

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