After recently attending a networking event in Chippenham, Wiltshire, I was asked by an individual what would be good to hold as an investment in his pension if the UK goes into a period of deflation. He seemed keen to find someone to discuss this with as he went on to mention that he had been struggling to find some good pension advice Chippenham area.
I feel that rising prices (inflation) is probably a greater concern over the longer run than falling prices (deflation). This is because governments and central bankers fear deflation more than inflation, especially if you are an indebted economy like ours.
This is because falling prices often mean lower profits, lower wages and therefore ultimately lower taxes, making it harder to pay interest on borrowed debt. This is the reason the British central bankers have gone to the extremes of slashing interest rates to near-zero and also effectively printing money.
Pension Advice Chippenham Networking Event
But going back to the original question from the gentleman I met at the Chippenham networking event, what advice could we give as to what he could hold in his pension if he feels at risk to deflation.
Cash – Cash has been a poor investment in the last 5 years. With low interest rates, after accounting for inflation cash savings will have typically lost money. But if the economy was faced with deflation, cash would be a different asset class altogether. If prices are falling at a 2% annual rate, but if your cash savings are earning, lets say 0% interest, then the ‘real’ return will be 2%.
Shares – In general shares don’t do well in deflation, but some can be worthy investments. As a general rule of thumb companies that are heavily indebted should be avoided, but companies with a strong demand for their products could protect investor’s money well, examples of this could be pharmaceuticals and health-care companies, especially if they pay good dividends.
Debt – This tends to be less relevant for pension advice, as most individuals do not secure borrowing against their pension, although it is possible to take a loan within a pension in some circumstances (speak to one of our independent Financial Advisers if you would like to find out more). Either way, it is good advice in periods of deflation to pay off debts, as falling/stagnant wages make it hard to service debts.
Integrity Pensions and Investments. Unit 3, Gate Farm, Sutton Benger, Chippenham, Wiltshire.