I’d Like to See an Index Linked Personal Pension Fund

Written by Karen Bryan

£10 and £20 notes alternative 240When doing my evaluation of the recently announced changes to access of personal pension pots, I came up with the idea of an appealing product – an index linked personal pension fund.

This pension fund would retain the spending power of your pension pot by being annually uprated by the rate of inflation, using the Retail Prices Index (RPI) rather than the lower Consumer Prices Index (CPI).

As the Financial Services Authority (FSA) mid annual growth rate of 5% is used in pension forecasting, it should be viable to offer an index linked pension fund, with RPI at 2.7%  (25 March 2014) + an 0.5% annual management charge, which leaves a healthy profit potential for the fund provider.

This product  would also focus pension fund providers on getting high returns on their investment in order to have a good profit margin. A proportion of very high profits from one year could be set aside to cover leaner years.

A product like this would encourage me to leave my pension pot invested and withdraw an annual income, in the knowledge that I could lock in gains made in stock market based pension funds by shifting to a fund which offered a guaranteed value. Currently, the interest paid on cash pension funds is lower than the annual management charge, so you really can’t afford to keep your pension pot in a cash fund for long.