People need to be aware of the double whammy of inflation and market risk when it comes to investing for the long-term, Tony Stenning has warned.
The chief executive of Catley Lakeman, parent company of derivative-based investment solutions specialist Atlantic House Investments, said the rise of defined contribution pensions and the transfer of risk from pension scheme sponsor to individual scheme member has made it vital for people to think more long-term about their savings.
Stenning, who is also non-executive chairman of The Investing and Saving Alliance, warned that people needed to be putting their money to work in funds that not only mitigated the effect of inflation and risk, but also helped secure a decent income in retirement.
The problem is, as he told FTAdviser In Focus, too many people in the accumulation stages are either sitting on a lot of cash savings, or trying to time the markets to chase returns - and they cannot afford to take that sort of investment risk when they are in retirement.
Nor can they rely on the government paying out a state pension - the responsibility for securing a long-term financial future is on the investor.
FTAdviser: Many surveys have shown that people have saved more than ever before over the past 18 months. What should people know about putting that money to work for their pension?
Tony Stenning: Putting your cash to work for your longer-term wealth has never been more important. Interest rates are virtually zero; some countries’ rates are less than zero and you have to pay the banks to keep your money. And with inflation clearly starting to increase, that all adds up.
FTA: Do people still not think long-term enough when it comes to their savings?
TS: It’s about the longevity of people’s thinking in terms of their portfolios. That old adage - ‘time in the market, not timing the market’.
We talk about it a lot but it is so important. Timing when to get in and out of investments can also materially affect people’s wealth if you get it wrong.
FTA: Are people relying too much on the state pension?
TS: Many years ago, you may remember, I wrote a blog on how to rethink pensions. At the moment we don’t have a pay-as-you-go system; it’s all based on current taxpayers.
My idea at the time was that the government could put £2,000 into an investment account for every child at birth - call it the State Pension Account. Based on current birth rates, this would be £1.6bn, then over 70 years that would have paid a pension equivalent to today’s triple lock through the power of compounding.
Of course, for the government of today that’s a £1.6bn cost.
FTA: Doesn’t this also mean the investor will bear the investment risk ourselves, when the current state pension risk is borne by the government itself?