I'm often asked by my friends for my thoughts on investment matters – and, occasionally, once they find out I work in finance, by taxi drivers, dentists and tradespeople too.

Often, it’s because they imagine I have the inside track to some get-rich-quick scheme or can give them stock tips. Other times it’s because they want some reassurance that what they are doing with their money is sensible.

I wouldn’t be surprised if many found my answers to be somewhat dull. I certainly don’t do stock tips, and I don’t see investing as an opportunity to fund my other interests or dabble in fun stuff like fine wine or collectibles, let alone the thrills and spills of crypto.

I remember a long-standing friend once telling me about the incredible returns that could be had from investing in vintage cars. He's a professional in this area and there is no doubt that some of the figures were very impressive. He gave me an example of one car that had tripled in value in just seven/eight years.

Funnily enough, I didn't hear about any of the losers.

I wondered where the conversation was going when he then asked me if he could cash his pension in to invest in classic cars. "No" was my answer.

He had started the pension conversation, so it was too good an opportunity to miss: “I love my pension”, I told him. “You should love yours too”.

Pension benefits

OK, ‘love’ is maybe too strong, even if it is St. Valentine’s Day. However, it's true that I do have a fondness for my pension, and with good reason, as I explained to him.

I've invested in a mix of global share funds and global bond funds. I have done nothing complicated or difficult. Over five years the return is over 60%¹. What's more, the pension is growing tax-free, and it is very low cost with an all-in fee of under 0.5%. Even better, my employer contributes and matches some of my contributions. If there is any money left when I'm no longer around I can pass it on to my children or beneficiaries with no inheritance tax to pay, depending on my age².

And that 60%-plus return I mentioned excludes the extra money I got back from the government in the form of tax relief! Because for every £800 of my after-tax earnings that I contributed to my pension, I was able to get another £200 added, representing the 20% tax I would have otherwise had to pay.

Every basic-rate taxpayer is entitled to these pension fund top-ups up to a £40,000 gross limit (or your total pre-tax annual earnings, if lower). And higher-rate and additional rate taxpayers can claim back even more via their annual tax returns.

As a result, the effective cost of a £1,000 contribution to an additional-rate taxpayer can be as low as £550³.

It has to be said that investment returns have been good over the last five years (just as they have been for classic cars) and there have been years when the fund has fallen in value (just as with classic cars). But this is a long-term investment. I really don't worry about the short-term value and I only look at it once or twice a year.

Once my friend heard this, he looked at me glumly and just said: "my pension hasn't done that!"

But then everyone may not think as strategically about their retirement finances as I and thousands of other Vanguard investors do. They may have too much cash, or they may be invested in funds with inappropriate risk levels or insufficiently diversified in too few shares or paying too much in investment fees, let alone have too much of their wealth locked up in niche physical assets.

Giving yourself the best chance of long-term investment success doesn’t require specialist knowledge. And it doesn’t have to be complicated. After all, choosing a well-diversified and balanced low-cost fund doesn’t take long.

My pension may not be as exciting as owning a classic car, collecting art or gold jewellery or buying non-fungible tokens but it will be more useful when I get old because it will help to look after my family and me when I stop working.

Do you need to start thinking of your pension differently so it can look after you one day as well?

 

¹ Based on an 80:20 split of shares and bonds.

² Tax is due if you pass away at age 75 or over, but not beforehand.

³ Based on current tax rates as at 2021/22.