We all know that Warren Buffett’s favourite holding position is forever. However, finding stocks that are able to prosper through multiple business cycles and economic downturns isn’t an easy task. Yet following a recent pull-back, I took the opportunity to buy into a FTSE 100 blue-chip stock that I believe has incredible long-term growth potential.

A powerful business model

Legal & General (LSE: LGEN) is primarily known for its insurance and retail retirement expertise. Indeed, it is the UK’s number one individual life insurance provider.

However, its business tentacles stretch far and wide. Its institutional retirement division takes on pension scheme liabilities from corporate schemes. Doing so helps companies de-risk their liabilities while providing guaranteed payments to individuals within their schemes.

Its investment management division has assets under management of £1.4trn and has deep expertise in defined contribution (DC) and defined benefit (DB) pension schemes.

Finally, its investment capital division invests across a number of specialist asset classes. This includes commercial real estate, clean energy, housing and SME finance. And L&G is a top-10 house builder by revenue.

Growth drivers

The sheer diversity of L&Gs business model is a significant selling point for me. It is in a unique position to capitalise on a number of long-term growth drivers. Many of these drivers provide a significant degree of immunity in a low-growth economic environment.

Ageing demographics is a trend that continues to accelerate across many western economies. Pension risk transfer (PRT) is a huge and growing market. In the UK alone, it is estimated that only 13% of £2.4trn of DB pension liabilities have been transferred to insurance companies such as L&G. The rising interest rate is a likely catalyst for companies to consider accelerating the de-risking of their pension plans.

Pension freedoms and welfare reforms add up to another huge driver for future growth. Over the past few years there has been an increasing awareness of the need to take personal responsibility for financial security, particularly in later life.

Climate change and technological innovation are key drivers too. For example, L&G has invested in over 500 start-ups to date.

Is Legal & General undervalued?

L&G’s recently-released half-year results convinced me that the market is undervaluing its long-term prospects.

In the last 10 years, the company has seen its earnings per share (EPS) and dividend per share grow by a compound annual growth rate of 11%.

EPS for the first six months of 2022 was higher than the company achieved in the whole of 2015. Today however, the share price sits at the same level as back then.

The business is confident that it will consistently grow cash and capital faster than its dividend commitment. This excess cash provides it with tremendous flexibility. It could, for example, decide to return excess cash to shareholders or reinvest for future growth.

Insurance is a risky business. Rising inflation coupled with low global growth is likely to hit L&G’s bottom line. Should inflation become entrenched and policy responses by central banks prove ineffective, a significant economic downturn is likely to follow.

Despite these risks, I feel that long-term structural changes across society are trends that L&G is well positioned to capitalise upon. That is why, in the last few weeks, I added to my position.

The post A FTSE 100 stock that I never intend to sell appeared first on The Twelfth Magpie.

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Andrew Mackie has positions in Legal & General Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, if you plan ahead and make a few smart moves now, you could give yourself a chance of retiring far earlier than your late 60s. With that in mind, here’s a look at three simple retirement planning moves that could help you retire early.

Bring together all your pensions

One of the smartest things you can do when it comes to retirement planning is to consolidate your pension accounts. Many people today have multiple pensions set up which makes the process of planning for retirement far more challenging. When you have multiple pension pots, it’s hard to keep track of them all. It’s also hard to determine how your money is invested.

By bringing together all your pensions into one account (opening a Self-Invested Personal Pension  or SIPP is one way to do this), you’ll have a much better idea of how much money you actually have. You’ll also have a better understanding of how much money you still need to save to be able to retire.

There are some situations in which pension consolidation isn’t the best move such as if you’re a member of a final salary pension. However, in general, bringing together your old pension accounts is a smart idea when it comes to planning for retirement.

Choose the right assets

Once your pension accounts are consolidated and you know how much money you have saved for retirement, the next step is to choose assets for your portfolio. The exact mix of assets you choose is known as your asset allocation.

Your asset allocation will have a big impact on the growth of your pension so it’s important to get it right. For example, invest too much in low-risk investments and you’ll struggle to grow your wealth. At the same time, invest too much in stocks and your retirement could be at risk if global stock markets collapse. You need to choose an asset allocation that is suited to your personal situation and risk tolerance. If you’re unsure about what asset allocation to go for, it could be a sensible idea to speak to a financial adviser.

Pick up bonus pension contributions 

Finally, if your goal is to retire early, you’ll probably want to take advantage of tax relief. This is essentially bonus money that the UK government is handing out to those who save into their pensions. Unfortunately, a lot of people don’t even know this exists.

Basic-rate taxpayers are entitled to 20% tax relief (higher-rate taxpayers are entitled to more), which means that if you contribute £800 into your pension, the government will add in £200 for you, taking your total contribution to £1,000.

Tax relief is a great deal and if you save into your pension on a regular basis, the bonus contributions from the government could make a big difference to your wealth over time. Ultimately, turbo-charging your pension pot in this way could enable you to retire far earlier than those waiting until State Pension age to retire.

The post Retirement planning: 3 simple moves that could help you retire earlier than the State Pension age appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If the thought of trying to survive on that amount of money in retirement worries you, it’s a good idea to take action, sooner rather than later. Here are three things you can do immediately to boost your chances of enjoying a comfortable retirement.

Track down old workplace pensions

One of the first things you should do if you’re serious about getting your retirement savings sorted is to work out if you have any old workplace pensions that you have lost track of.

The average person today has over 10 jobs in their career, so there’s a chance you may have had pensions with past employers and forgotten about them. Indeed, according to research from the Association of British Insurers (ABI) and the Pensions Policy Institute (PPI) last year, there are around 1.6m ‘lost’ pensions in the UK, worth a staggering £19.4bn, or around £13,000 per pot.

If you do have any workplace pensions that you have lost track of, it’s definitely worth tracking them down. You could have substantial pension savings you don’t even know about.

Consolidate your pensions

The next smart move is to bring together any old pensions accounts and consolidate them into one account. By having all your pensions in one place, you’ll have far more control over your money, and managing your retirement pot should be easier as you’ll have a much clearer picture of your overall pension savings.

An easy way to do this is to open a Self-Invested Personal Pension (SIPP) with a financial services provider such as Hargreaves Lansdown or AJ Bell and transfer all your old pension accounts into your new account. This is a simple process that is usually just a matter of filling out a few forms.

I’ll point out here that in some cases, a pension consolidation may not be the best move. For example, if you are a member of a defined benefit pension scheme you may be better off staying in it. If in doubt, speak to a financial adviser or pensions expert.

Get saving and investing 

Finally, putting a regular savings and investing plan in place is also a very smart idea. Put a savings plan in place early enough, and invest your money in the right assets, and you could potentially build up a portfolio which generates a nice little additional retirement income stream to supplement your State Pension income.

And don’t forget about ‘tax relief’ – if you save into a SIPP account, the government will top up your contributions. 

The post Worried about your State Pension retirement income? Here are 3 things I’d do immediately appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But final salary pensions and jobs for life are now mostly a thing of the past. And interest rates on cash savings are well below the rate of inflation, so the purchasing power of our cash tends to fall each year.

For many people, I think a more active approach to retirement saving is needed. Here are three things I wish I’d known when I started out in the world of work.

1. The eighth wonder of the world

Albert Einstein once said that “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t, pays it”.

If you’re unsure what compound interest is, you’re not alone. But it’s simple enough. Compound interest means earning interest on interest. In other words, it means reinvesting interest payments, rather than withdrawing them.

This may sound like a small thing, but it’s not. For example, let’s imagine that you invest £3,000 in an investment that returns 5% each year for 15 years.

If you withdraw the interest each year, then by the end of the final year you’ll have received £2,250 in interest and would have a total of £5,250.

If you reinvest the interest each year instead of withdrawing it, you’d have a total of £6,237 at the end of 15 years. That’s 19% more than you’d have got by withdrawing the interest.

2. Don’t refuse offers of free money

Millions of us turn away gifts of free money every year, by refusing to sign up to workplace pensions, or by paying the minimum allowed each month.

I can understand this. Around the time I got my first proper job, pensions had a bad name. Lots of my older peers had suffered as a result of mis-sold personal pensions in the late 1980s.

The young, inexperienced me decided that paying into a pension was probably a waste of time. So I cut my monthly contribution to the minimum allowed and took home the extra cash instead.

Of course, what I should have done was to pay in the maximum allowed. This would then have been matched by my employer, doubling my pension contributions.

When you’re getting 2-for-1 on your savings, even a very average investment is likely to deliver attractive gains over long periods.

3. I should have trusted the stock market

I wish I’d understood the long-term earning power of the stock market. Over the last hundred years or so, the UK stock market has delivered an average return of around 8% each year.

If you invest £200 per month at 8% for 20 years, then my sums suggest that after 20 years, you should have about £120,000.

If you pay in for 30 years, the power of compounding means that you’ll have about £298,000 after that time, even though you’ll only have paid in an extra £24,000.

The best part is that this kind of return is easily and cheaply available to everyone. All you need to do is invest in a FTSE 100 tracker fund, preferably in an ISA or low-cost pension. With minimum monthly payments as low as £25, there’s really no reason not to get started today.

The post Retirement saving: 3 things I wish I’d known when I was 20 appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The good news is there are several ways you can turbocharge your retirement savings by selecting the right investment vehicle in the first place. So I’m going to draw on the philosophy of the martial art of judo to illustrate the point.

One of the main principles of judo is to use the strength of others to gain an advantage, and I think this is key to getting the best performance from your retirement savings.

How to use the strength of others to help you save

It’s best to save with the help of others. In a judo match, one person tries to defeat the other by using his or her opponent’s own weight or strength against them. For example, if your opponent attacks, you would use the momentum and energy of their attack to assist you in throwing them to the floor!

The basic idea is that you get all the help you can, so that winning isn’t down purely to your own strength. And in a similar way, you can save like that too – so what you accumulate is not down purely to the money you put in.

One way of doing that is to join your employer’s Workplace Pension Scheme, if you have an employer that is. Doing that will count as financial judo in two exciting ways:

• Your employer will usually help you save by adding between 3% and 10% of your annual salary ON TOP of what you pay into your pension yourself.
• All contributions from you and your employer will be free of tax, so that’s often at least another 20% that will be added ON TOP of what you and your employer pay in.

Taking advantage of your employer’s Workplace Pension Scheme is smart financial judo! Another smart move is to take full advantage of a Lifetime Individual Savings Account (LISA) or a Help-To-Buy ISA if you meet the age and other criteria. Doing that will count as financial judo in two more brilliant ways:

• The government will add an extra 25% to what you save in at least one of them.
• All the gains in your ISAs will be free of tax.

The big boost from tax-relief judo

If you don’t have access to any of the above smart saving vehicles you can still put money into a personal pension, or a Self-Invested Personal Pension (SIPP), which will give you tax relief on the money you pay in. Or you can take advantage of your annual £20,000 general ISA allowance, which means all your gains inside the ISA wrapper will be free of tax. This will be a big boost to your savings. Within an ISA, you can save cash or invest on the stock market. At The Motley Fool, we believe that share-backed investments will likely serve you well over the long term just because they have outperformed all other major classes of asset in the past. 

The post How to boost your retirement savings… like a judo expert appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

And the government dictated how your fund was eventually to be turned into an income stream once you’d retired — which meant around 90% of pensions ended up invested in annuities. Now, I reckon annuities are dreadful things. Because of the emphasis on the cast-iron safety that’s supposedly needed to secure a guaranteed income, returns are typically disappointingly low.

So you worked all your life, and someone else got to dictate how the fruits of your labour were to be managed, regardless of your personal circumstances or preference. Disgraceful.

Moving on

Thankfully those days are now behind us, there’s no requirement to buy an annuity any more, and with most pension schemes we can take full control of our money. There are restrictions on defined-benefit schemes (schemes that are disappearing fast), but there are often still ways to gain control over those too.

We’re now allowed to to engage in what’s known as drawdown, which allows us to take whatever we want from our pension pots as we wish — up to the full amount if we feel like it, paying the appropriate tax, of course. So if you want to blow the lot on a flight into sub-orbital space, that’s up to you.

But what are people doing with their pensions? Well, in big mistake number one (actually, no, the space trip might be number one), many are just leaving them where they are and letting the old annuity method take its toll, instead of converting to a drawdown and managing their own needs.

But many of those who actually do convert their pension plans are making what is probably an equally big mistake. They simply get their existing pension provider to switch their fund to a drawdown one and do not spend any time checking out the competition and looking for better deals.

Charges can hurt

While management charges are generally relatively low across the industry, there can still be significant differences. If, for example, you have a £200,000 investment pot, the difference between a 1% annual management charge and a 0.5% charge is £1,000 per year — or £20,000 if you live for another 20 years. While that won’t get you into space, it could pay for some nice holidays for you, so why let it go towards paying for your fund managers’ yachts?

And if you want a further idea of the amount that could be lost by paying unnecessarily high charges, just think about the £24.8bn that was contributed to personal pensions in the 2016-17 tax year. If the owners of even half of that could cut their charges by the same 0.5%, we’d be looking at an annual saving of £62m.

That’s a potential £62m that could go into pensioners’ pockets every year rather than pension managers’ pockets.

Do it yourself

Even if you can secure the lowest charges for your pension, you could still be entrusting the long-term value of your cash to whatever investment strategy your provider chooses, no matter how good or bad it is, and irrespective of your personal desires. How can that be best for you?

I’ve recently been seeing complaints from pensions commentators that too many people are choosing their own pension providers without taking professional advice. The industry doesn’t like that — and there’s surely no conflict of interest there either!

Here at the Motley Fool, we are great champions of individuals making their own decisions and not being coerced by advisers.  

And that freedom to choose our own pension investments, is, in my opinion, as much a fundamental freedom as being able to invest our ISA money wherever we want, wear whatever clothes we want, and engage in free speech.

Or in other words, in my personal view, most people don’t need to pay for professional advice.

So what do you do?

Thankfully, since pension rules were relaxed, here in the UK we’ve seen a burgeoning of financial services companies offering Self-Invested Personal Pension, or SIPP, accounts. And there’s only one manager of a SIPP account — you.

How do you transfer a qualifying pension to a SIPP? I did it myself a few years ago, and it was really pretty simple. All I had to do was open a SIPP with my chosen provider, then fill in some transfer forms — one for the existing pension company and one for my SIPP provider. And it was done very quickly.

Then all I had to do was choose my investments. One of the simplest, and one which attracts low charges, is an index tracker — a fund that attempts to emulate the FTSE 100, for example, or perhaps the FTSE 250.

And with a long-term view, you should do fine. The FTSE 100 has gained 20% over the past five years, and it’s provided dividends of around 3%-4% per year on top of that. The FTSE 250 has done even better, with a 42% gain over five years.

Pick your own

Or you can do what I do and just pick your own shares in individual companies. My preferred strategy is to go for FTSE 100 companies offering high dividend yields, choosing them from different sectors, and then reinvesting my dividends — and I hold for the long term. I’m not retired yet, but when I am I intend to take my dividends towards my income. Oh, and I go for the occasional growth candidate with a small amount of money now and then, just for a bit of excitement.

The bottom line is that if you can get your pension cash into a low-charge SIPP, you are then in control of your money, and you are not beholden to some suits in the City.

The post Millions of Brits could be making a huge retirement mistake appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A key part of that regret is not starting soon enough. Those first few years of pension savings, compounded over all of the following years, would be worth far more to me now than the same amount saved over the last four years.

The early years are crucial

Suppose you had a working life of 40 years, and you invested £100 per month at an annual return of 6% for the first five years, and then you moved jobs and didn’t invest a further penny. After five years you’d have accumulated slightly under £7,000, and a further 35 years of compounding at 6% per year would turn that into £53,700.

Another worker who only started saving 22 years before retirement, and then put away £100 per month at the same 6%, every month for the whole period… they’d end up with almost exactly the same amount. Your first five years of investing would be worth the same as their 22 years of effort — thanks to your 35 years of compounding.

ISA millionaires

Would you believe there are probably more than 200 ISA millionaires in the UK today? While company pensions and SIPPs provide one route to retirements savings, making the most of your annual ISA allowance is a great way to provide for your old age — especially as all that lovely share price growth is tax-free.

The new allowance from April this year stands at £20,000, and if you’re fortunate enough to be able to invest that full amount every year at an annual return of 6%, it would only take you 24 years to reach a cool million — and only 19 years if you could achieve 10% returns.

Suppose you can’t invest that much, what would it take to achieve a millionaire’s retirement in a 40-year career? The answer is £6,300 per year, or £525 per month, at 6% returns.

Dividends do it

These examples assume all dividends from your shares are reinvested, but surely taking a bit of that cash each year to spend won’t do any harm, will it? After all, you’ll still have your shares appreciating for decades. Don’t be tempted, because it can kill your performance.

The Barclays Equity-Gilt study has been comparing annual returns from shares, cash and bonds for more than a century, and shares beat other forms of investment hands down. But the study also shows the benefit of reinvesting dividends, and it’s quite astonishing.

If you’d invested £100 in the UK stock market in 1945 and spent all your dividends, you’d still have a very nice £9,148 after adjusting for inflation — more than 90 times your original investment. But if you’d reinvested all your dividends in new shares, you be sitting on an inflation-adjusted pot of a stunning £179,695.

What shares should you buy?

I always suggest FTSE 100 companies paying reliable dividends as cornerstones of a retirement portfolio, and that includes ones like BP with its 6% dividends, Taylor Wimpey currently offering 8%, Legal & General and SSE also on 6%, and AstraZeneca offering 5.5%.

Then all you have to do is dream about that comfy old age you’ll surely have ahead of you.

The post Here’s how you could retire as a millionaire appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca, Barclays, and BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

It’s easy to see why savers have been skipping pension contributions in recent years. The cost of living has only increased while wages have stagnated and rock bottom interest rates are doing little to encourage any of us to store up enough for our future comfort.

Unfortunately, most won’t find out that they haven’t saved enough for retirement until they actually give up work, which could mean a nasty surprise down the road. And with the government’s finances under increasing strain, there’s no guarantee the state pension will remain as (relatively) lucrative as it has been for the past few decades. This could mean the removal of an important safety net that savers have been able to fall back on traditionally. 

Time to start planning 

Saving for retirement doesn’t have to be a time-consuming nor stressful process. Even rock bottom interest rates shouldn’t deter investors. 

Historically, the stock market has returned between 6% and 9% on average per annum, and these returns are available with minimal effort. 

A low-cost index tracker fund will replicate the FTSE 100’s movements for as little as 0.5% per annum in management fees, removing the excessive costs that come with a bespoke investment plan and also removing the stress of stock picking. 

Above all, the easiest way to ensure you won’t run out of money in retirement is to start saving early and use the power of time and the magic of compounding to do all the heavy lifting.

Starting early 

For most 20-year-olds, the idea of saving for retirement may seem silly, after all with the government retirement age set at 65 and rising, you’ve still got at least 45 years to negotiate. But if you start saving at the young age of 20, you only need to save as little as £61 a month or £2 day (the price of a coffee) to reach a target of £1m by age 65. This calculation assumes the investor will achieve an average annual return of 12%, which seems high but isn’t entirely unachievable.

There are probably few 20-year-olds already saving for their retirement, but the above illustrates a key point. By sticking to a simple long-term savings plan, it’s easy to retire comfortably. 

If you delay your pension saving to age 40, you will need to put aside £625 a month to reach the £1m by 65. And at age 50 you need to put aside £26,800 a year to reach the £1m target by 65.

The bottom line 

Overall then, to avoid running out of money in retirement, a future around half of the UK’s working population is currently heading towards, you need to adopt a rigourous savings plan as early as possible. Doing so will make your life much easier. It will give you peace of mind that your retirement pot is growing steadily, and will cost much less overall.

The post Almost 50% of workers have this major retirement regret appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

It wasn’t on my mind, but it probably should have been, after the latest report from pension specialist LCP shows a massive increase in the overall pension funds deficit for our FTSE 100 (INDEXFTSE: UKX) companies. At the end of July 2015, the total deficit stood at £25bn, but that’s estimated to have soared to £46bn at the same stage this year, and to have reached a staggering £63bn so far in August.

The reason behind the surge is a fall in bond yields since the vote, as bond income contributes a lot to today’s company pension funds, with an extra hit coming from the Bank of England’s decision to cut interest rates from 0.5% to 0.25%.

Poor returns

Although pension fund trustees get to decide on their own investing strategies, they must consider the risks and returns of various investments, and ensure an appropriate level of diversification commensurate with the usual professional advice. What that means is they’re effectively obliged to invest in a range of shares, bonds, gilts and other things — and that’s pretty much guaranteed to provide inferior long-term returns to a shares-only portfolio.

According to the annual Barclays Equity-Gilt Study, investing in shares has beaten cash 91% of the time over rolling 10-year periods since 1899, shares have won in 99% of all rolling 18-year periods, and over 23-year periods shares have never lost! That suggests a long-term strategy is needed to keep your investments safe — but one thing pension funds do have is time.

If our pension funds are investing sub-optimally and look like being hit by these deficits, what’s the answer? Well, the first thing to do is not panic.

One thing LCP pointed out is that these same FTSE 100 companies are still paying out stacks of cash in dividends — significantly more than the deficit, it seems. So if a pension payments crunch did actually happen, holding back a year of dividends would be ample to keep pensioners’ incomes going — not that anything that drastic is likely to happen.

And the long-term superiority of shares as an investment points to the other strategy we should adopt. Just as pension fund managers won’t put all their investments into the share basket, so we shouldn’t base our old-age security on just a company pension.

Do it yourself

In addition, we should be investing some of our own cash each month to add to the pot. And if you’ve got decades to go before you’re likely to be ready to retire, the obvious choice is to put it in shares — using a SIPP, an ISA, or both depending on which taxation benefits are likely to be more valuable.

What should you actually buy? The easiest thing is to go for a low-cost index tracker fund, and then just forget about it until you’re close to that retirement party — though personally, I’d suggest a portfolio of top dividend-paying FTSE 100 shares, diversified across sectors to minimise the risk.

But the key thing is to take control yourself, because if you need a job doing well… you know the rest.

The post What does the ballooning FTSE 100 pension deficit mean for your post-Brexit retirement? appeared first on The Twelfth Magpie.

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This sudden rush towards government securities has pushed down yields, (as bond prices rise, yields fall) which is great news for borrowers but bad news for bond investors who are now getting a lower return on their investment.

More for less

The single largest buyers of government bonds (excluding central banks via QE) are pension funds. The high quality and long-term nature of government bonds makes them the perfect assets for pension funds that have to match today’s inflows from contributors to future liabilities or pension outflows.

With yields falling this task of matching inflows with future outflows is becoming harder and harder. Most pension funds target a return of 5% to 10% a year on their assets. With most government bonds now yielding less than 2%, it’s easy to see the scale of the problem facing the industry.

Defined benefit funds are the most at risk. According to research from Bank of America at the end of April, the average funded ratio of the top 100 US corporate defined benefit pension plans sat at 77%, and this figure was calculated before the post-Brexit yield slump. The funding ratio of 77% indicates that the $3trn pension universe surveyed is running a $500bn funding gap.

Unsustainable deficit 

Here in the UK, it’s estimated that 11m people are reliant on defined benefit pension schemes and after recent market movements it’s estimated that UK pension deficits hit a record £935bn this week.

There’s no doubt that this is a colossal sum and meeting these liabilities is going to cause a serious headache for the worst-offending companies.

For example, BT’s pension deficit has increased by more than 50% in 18 months (to the end of May). Analysts at investment bank Macquarie believe the deficit now stands at £10.6bn. To put this figure into some perspective in the year to 31 March 2016, BT reported a pre-tax profit of £2.6bn. Macquarie believes that considering the present deficit, BT will have to pay £1bn per annum through to 2030 to fill the pension black hole.

The big question now being asked is, will companies ever be out to meet these pension liabilities?

Unfortunately, there’s now a very real chance that many businesses won’t be able to meet these obligations as deficits at some companies eclipse profits. Meanwhile, the UK’s Pension Protection Fund, a government-sponsored lifeboat for collapsed pension schemes, only has a funding surplus of £4.8bn, that’s just 0.51% of the total value of pension deficits as reported last week.

The figures really speak for themselves. The UK’s pension deficit is only getting worse, and there seems to be no way out.

Protect yourself 

The best way to protect yourself from the upcoming pensions bombshell could be to look after your own pension by investing in shares. And the best way to invest for the highest return is to look to high-quality blue chips with international operations, sustainable dividends and records of achieving the best returns for investors. Companies such as Unilever, AstraZeneca and GlaxoSmithKline all meet these criteria, but there are many more. 

The post Why Brexit has doomed your pension appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.