Alan Steel: It might be the best of times or the worst, but always invest

CONFUSIOn is apparently one of the main reasons why so few of us save as much as we ought to in investments such as individual savings accounts (Isas) and pensions. And the main causes of that confusion among consumers is information overload and lack of perspective.

Take the past 14 years. It’s easy to think of loads of reasons why you shouldn’t have invested, especially in actively managed funds. That’s the message being preached. You can easily come up with lots of excuses for not investing, including currency crises, the dotcom bust in 2000, several recessions, various terror attacks – most notably in New York on 11 September, 2001 – the sub-prime lending fiascos, bird flu scares and eurozone disasters, to name a few that come to mind.

And then there’s the “lost decade” in stock markets. Don’t you know you can’t beat an index tracker, that pensions are a waste of time and that, when it comes to funding your retirement, it’s property every time? I’m sure you can think of other fairy stories too.

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Let’s look at a few examples of how patience and knowledge can help investors in the best and worst of times.

Take my cousin, who’s so afraid of stock markets she’s kept most of her savings in bank savings accounts earning less than 0.1 per cent. In 1998 we managed to persuade her to put £6,000 into a personal equity plan (Pep), in Neil Woodford’s Invesco Perpetual High Income Fund. Woodford’s a sensible fellow who’s been round the block a few times. Now, if that £6,000 had been invested in an FTSE index tracker it would now be worth about £7,080. If she’d left it in an average bank account she would have done slightly better, amassing about £8,000.

But she won a watch by sticking with Woodford – after all charges and taxes, the investment today is worth £19,285, which means the returns have compounded at 9 per cent a year.

So no lost decade for her then – and so much for Index Trackers. Needless to say she’s delighted. Now she can tweak the funds managed by Woodford and receive a tax-free income of £112 a month. That’s quite a bit better than £8-a-year interest from the bank account.

When it comes to pensions, how many of us have been told they are a waste of space? And yet, year after year, I remind folks just how attractive they are, especially if you structure them properly with the right investments inside.

A long-standing client and good friend is sadly dying of terminal cancer. The pension fund we helped him build we’ve long recommended he shouldn’t touch for as long as possible. That means no tax-free cash at all before age 75. Because if you die before 75, the entire fund is paid out tax free.

Because he is diagnosed as having less than one year to live, the pension fund has been paid out tax free now even though he is only five months from age 75, saving his family a seven-figure sum in tax.

This couldn’t have happened had he removed any previous tax-free cash.

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This opportunity also applies to members of final salary pension scheme. We’re assisting a young man in his mid-forties also with terminal cancer, with a wife and young family, and who is in a final salary scheme. Typically, he would die and his family would only receive some life assurance and a minuscule widow’s pension, but he too can also have the entire accumulated pension fund paid out tax free

So, two things to remember – always invest with quality active managers. And please recognise the outstanding value pensions give in times both good and bad.

• Alan Steel is chairman of Alan Steel Asset Management

www.alansteel.com

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