Investing in a personal pension can sound scary. It’s tempting to keep savings in cash instead. But the reality is that, with interest rates lower than they’ve ever been, cash savings aren’t likely to rise in value.
Apart from an emergency cash fund, I’m putting most of my spare cash into the stock market. Here, I’ll explain how I’d invest £100 a month in a pension, using a simple ‘autopilot’ strategy that could generate a £95k nest egg in 25 years.
Getting started with pension investing
I’d start by opening a low-cost SIPP (Self-Invested Personal Pension). SIPPs allow you to manage the investments inside your pension in a similar way to a regular share-dealing account.
However, if I had £100 a month to invest in a pension, I wouldn’t buy individual shares. With typical dealing costs of £5-£10 per trade, the costs would mean each trade started with a 5-10% loss.
What I’d do instead would be to invest my monthly pension cash in a cheap index tracker fund.
Less than 10 years to retirement
If I had less than 10 years to retirement, I’d probably choose a FTSE 100 tracker fund. The FTSE 100 contains the 100 largest companies traded on the UK stock market. Examples include Tesco, BP, and Vodafone.
These companies’ size and maturity means they don’t need to invest so much of their income in growth. This leaves more cash available for dividends, the regular cash payments received by shareholders.
In general, a larger part of the returns from the FTSE 100 come from dividends, with less from share price gains. I see this as an advantage over shorter periods. Share prices can go up and down depending on market events. But dividends tend to be more stable. So, if I was retiring in less than 10 years, this is what I’d do.
Longer than 10 years? I’d target growth
Over longer periods, I’d aim to generate more growth from my pension investing. A long timeframe means I’d be able to ride out any downturns and benefit from the long-term growth the stock market can provide.
What I’d do in this situation would be to invest my £100 each month into a FTSE 250 index tracker fund. Companies in the FTSE 250 are usually well-established and profitable, but they’re a little smaller than FTSE 100 firms. This means that they have more room to grow.
Over short periods, the FTSE 250 can be more volatile. When the stock market crashed in March this year, the FTSE 250 fell further than the FTSE 100.
But, over long periods, history suggests the FTSE 250 will outperform the FTSE 100. Since November 2000, the FTSE 250 has risen by 226%. The FTSE 100 has only gained 17% during the same period.
Pension investing on autopilot
That’s how I’d build a pension with £100 per month. I’d set up the payment as an automated monthly investment and then forget about it for a few years.
This kind of investing works best if it’s left alone for many years. It’s not possible to predict the exact value of a fund in the future. But, based on historic rates of return, I’d expect my £100 per month to be worth around £95,000 after 25 years — perhaps more.
