misunderstanding pensions

I’m an avid reader of money makeovers and discussions individual personal finances and I’m struck by how often people say that they don’t trust pensions. I realise that this is affected strongly by the private pensions mis-selling scandal and the collapse of Equitable Life. And it’s certainly true that lots of pension funds have been adversely affected by the bursting of the dot-com bubble. But, I’m starting to think that lots of British people don’t realise what pensions are.

As far as I can see, pensions are just a tax wrapper. The wrapper is just a set of rules that allow you to get tax breaks. The underlying investment is what you should be relying on to make you money. It wouldn’t surprise me if many of the people who had money-purchase pensions in 2000, didn’t realise that some or all of their money had been invested in the stock market. And if they didn’t realise where their money was, they probably wouldn’t connect the bubble bursting with their loss of pension funds.

A pension isn’t something to be mistrusted; it’s just a set of rules. Your best weapon in preventing mis-selling is to educate yourself. If you want to mistrust something, then it should be the underlying investment. If you truly believe that shares are on average going to do worse than savings accounts in the next twenty to thirty years, then you can put a pension wrapper on a cash savings account.