# Key Post:  How should I invest my pension fund?



## Brendan Burgess (13 Oct 2004)

If you have a PRSA or a defined contribution scheme, you will have a choice of where to invest your money – typically 100% equities, 100% bonds or a mixture of equities and bonds.

*The majority strategy*
The majority strategy as indicated by the default investment strategies of the PRSA fund managers is that you should be mainly invested in equities when you are young. From around 10 years before retirement, you should gradually switch over to safer investments such as cash and government bonds to protect against a stockmarket slump. 

The thinking behind this view is that a younger person can handle the ups and downs of the equity market, but a person approaching retirement cannot take the risk that there will be a stockmarket crash just as they have to cash their pension. 

I agree that if a person is obliged to buy an annuity on retirement which will be their  only income, then they cannot handle the risk of a sudden fall in the stockmarket. They should switch to safer investments as retirement approaches. 

*I believe that the majority strategy is wrong for most people…*
If you are not obliged to buy an annuity or if you have significant other assets or income on retirement then you should remain fully invested in equities. 

The stockmarket, despite its ups and downs, provides the best long term investment returns. So long term savers should be primarily invested in the stockmarket. The state of the stockmarket at retirement is irrelevant to you. You will be taking money out of your pension fund and switching it into an ARF or into your own personal investments. If you are planning for the long term, then you should be investing in the stockmarket. 

*But I will be using my tax-free lump sum to pay off my pension mortgage?*
This is an exception where you should probably be moving some or all of your fund to a less volatile gilt fund. If you are obliged to repay an interest only mortgage on retirement, then you will not be able to handle a stockmarket crash.

*But I don’t like investing in the stockmarket?*
It is important to realise that there is absolutely no safe place for your money. Over the longer term, the stockmarket is much safer than a deposit account. If you retire at 65, you can probably expect to live another 20 years or so. Over the next 20 years, any money in a deposit account will probably decline in  real value due to inflation. 

If you had received a lump sum of €10,000 on retirement 20 years ago, and if you had let all the interest accumulate, it would be worth around €22,000 today. The general price level has almost doubled over the past 20 years, so in reality, your money is worth exactly the same 20 years later. If you had been living off the interest in the meantime, you would only have €10,000 left.  If you had invested €10,000 in the Irish stockmarket 20 years ago and reinvested the dividends, it would be worth €200,000 today, despite the volatility of the past few years. 

If you had retired in June 2001 and invested your lump sum in the stock market just as it hit its all time high, you would have temporarily lost 27% of your money. But just three years later, the index had recovered and exceeded its previous high. In the meantime, you would have earned around 8% on a deposit account. So you would have lost nothing by investing in the stockmarket. And remember that is after being unlucky enough to invest at the worst possible time.


----------

