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Personal pension the safest investment bet in these troubled times

It seems to be a year for exceptional circumstances with the worst winter weather for 20 years, and the gloomiest economic outlook since the 1930s. Added to this the lowest interest rates since the 1700s.

It seems to be a year for exceptional circumstances with the worst winter weather for 20 years, and the gloomiest economic outlook since the 1930s. Added to this the lowest interest rates since the 1700s.

So in these troubled times where does the investor go who wants a guaranteed return on their capital? Many people are still shying away from equities even though they are now looking to be good value for money if you pick correctly. To be fair even in the best of times we cannot consider equities to be guaranteed investments.

Interest rates on bank savings are now at an historical low even before the latest rate cut was announced last week. The best rate available currently on instant access is 3.5% gross, for a higher rate tax payer this is equivalent to 2.1% net; not enough to offset the effects of inflation with the current consumer prices index of 3.1%.

To give this some perspective £10,000 invested for 12 months in the BEST instant access account will be worth £9893.49 in real terms, a loss of £106.51 in spending power.

Inflation does seem set to fall and possibly quite sharply, however with interest rates as low as they are money held in deposit accounts is unlikely to even keep pace with inflation.

So what is this guaranteed investment ? A personal pension

Now take the above example – if that same person had invested £10,000 NET into a personal pension as a higher rate tax payer, the Inland Revenue will automatically boost this investment to £16,666.

Ignoring any growth in the pension, at retirement it is possible to have 25% of this fund back tax free with the remainder returned as an annuity. Annuity rates for a 60 year old male wanting a level income are in the region of 6.5%.

Therefore £10,000 invested would provide a lump sum of £4166.50 and a guaranteed income of £812.50 per annum. This guaranteed income is in return for a lifetime investment of £5834 this being £10,000 less the tax free lump sum of £4166. This means an effective return of 13.9%. Not a bad return in troubled times !

We would not pretend that pensions can replace deposit accounts, however for those with spare capital, especially those looking to retire quite soon, a pension can be placed in a very low risk fund and will provide a better return than any other investment.

Simon Dickerson, Medical & Financial Top 5 instant access

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