MONEY COMMENT
Pension Funds Up 15% In 2003

By Stuart Watson (TMFTiger)
December 23, 2003

Barring any last-minute mishaps, 2003 looks like it will have been a good year for your pension fund. HSBC reckons that the average balanced fund rose 15% in the first eleven months of this year, bringing to an end a three-year run of losses.

If you've had an eye on the stock market, then this probably won't surprise you too much. Balanced pension funds tend to have somewhere between two-thirds and three-quarters of their money invested in shares. Most of the rest is likely to be in bonds and gilts with cash and property making up the balance.

So far this year, the UK market is up around 18%. Pension funds also invest in overseas equities and they've done well too. In pound terms, the US market is up around 15%, France around 25% and Germany about 45%. Even Japan, which has struggled for more than a decade, managed an increase in excess of 20%.

Bonds have not done quite as well this year. They've gained just a few per cent. So this has held back the overall performance of balanced funds. Still, the 15% gain is more than welcome.

But don't get too carried away. Over the next couple of decades, it's likely that very few pension funds will be able to boast average annual gains of double-digit amounts. With pension fund managers becoming increasingly more interested in bonds, average returns are much more likely to be in the high single-digit range.

Although that sounds low, it's well ahead of inflation. Provided you've chosen a low-cost fund, building a retirement income through a pension fund still makes sense. If you're a higher-rate taxpayer and your company makes a contribution to your fund, then it's even more attractive. Don't rely on it entirely though. If you can afford to build up a nest egg of ISAs as well, you'll be in a much better position that most people when you do reach retirement age.