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When I started freelancing some years ago I took out a pension scheme with a large German bank.

Although I’m a long way from pension age, It seemed the right thing to do. Since then I’ve changed my mind on the issue of pensions. I now no longer consider private pensions to be a good deal.

Let me explain…

At the time, I’d moved from being an employee with the security of the lavish German social insurance system (I was living in Germany at the time), to becoming a self-employed person who from now on had to provide for himself.  We’re told we should provide for our retirement and although pension schemes may seem a bit boring, they’re said to be a Good Thing.

So that’s what I did. A few years later I even added a second private pension scheme, this time with a different provider.

Some years on from there I went back to becoming a salaried employee. Meanwhile I kept the two pension schemes. Plus I was now once again contributing to the German public pension system as well.

Pension funds play God with your money

Since quitting the corporate employment world my attitude to private pension schemes has changed. Even before this I’d felt more and more encumbered by these schemes. The amount of the contributions was continually being raised by the insurance companies, supposedly in line with cost of living increases.

True, the amount of pension I’d receive was also increased as the statements from the pension fund showed. But I began to feel the whole thing was more for the benefit of the bank and their employees than for me. I was paying for their admin costs, their offices, their infrastructure and their profits. Paying now, in money I earn now, in return for promises which may or may not be realised in the future.

Basically with a pension scheme you are putting your financial future at the mercy of the pension company. Their terms and conditions determine everything, leaving you with little or no rights. What they say, decide, revise and renege on goes – and you have little recourse.  The small print gives them the right to play God with your funds and your pension future. It’s a black box investment scheme that gives you little say or control.

What happens to pension funds in a banking crash?

Good question! Consider the credit crunch banking crisis of 2008/2009. Their statements suddenly looked much less attractive. The promised pension was less than before the credit crisis. Yet the contributions I was expected to make continued to increase.

The individual never wins against large financial institutions. You treadmill away to pay them every month, so they get their hands on your money and write and rewrite the rules as and when it suits them.

What will these financial institutions manage to achieve over the next 20, 30, 40 or more years? Another credit crunch banking crisis? I wouldn’t rule it out for one moment. In fact, I think it’s highly likely. I don’t have confidence in any of them. I’d trust a toddler with a piggy bank more than I trust any of these “financial institutions” and their collective follies.

Pensions are for 9 to 5′ers

There’s another reason I’m now opposed to pension schemes. I see them as something for 9 to 5 er’s.  They appeal to that sort of thinking – the idea of dividing your life time strictly into “working time” and “retirement time”. They’re also unadventurous forms of investment.

I don’t accept that pension schemes are a good deal or even a wise investment. Plus they serve as a way of keeping you on the 9 to 5 treadmill.  You can do better things with your money than to give it to a private pension fund to administer and live off.

You don’t know how long you will live, or what will happen to the financial system in the meantime – for you it’s an uncertainty. But they sure as anything get to benefit from your money right now. For them, that’s a certainty. Private pensions are a black box that offer you little transparency.

Another point about pension schemes is that the money that you pay into the fund – or more precisely, that which is left over after they’ve deducted their income and profits, is only invested on the stock market, like most investments.

Take control of your investments!

But you can invest on the stock market directly yourself.  If you invest on the stock market directly, without the intermediary of a pension fund, then YOU have full transparency, YOU have control and YOU stop the pension fund taking their share of their infrastructure costs and profit margins.

And you have just as much certainty. In fact, you have more certainty, because you’re not at their mercy and you have 100 percent control over your investment.

Just make sure you always diversify your investments. You can also for example buy your own house or apartment. I’m not really into real estate, I think it makes you too immobile. Plus it’s debatable as to whether it’s a very good investment, taking into account the mortgage interest you pay and the returns you can get from stock market investment by comparison.

But at least home ownership can save you from paying rent later in life.  And in the long run property prices tend to rise everywhere. Plus it gives you full control and transparency over your investment, unlike with a private pension scheme.  Real estate is a plodding sort of investment, but you could do worse.

The stock market also always rises in value over time – and tends to increase much more in the long run than real estate does. However the stock market involves involves weathering substantial up and down swings in values in the short and medium terms.

If you find the stock  market too complex or scary, you can invest in a unit trust or investment trust scheme. There are also monthly schemes that you can invest in. Or you can do what I do and do both. Run your own share portfolio and contribute to unit trusts. Unit and management trusts of course take a management fee cut, but they tend to be better regulated than private pension fund.

Take a look at ETFs

Nowadays I’m more a fan of ETFs – exchange traded funds. These are investment funds denominated in shares which are traded on the stock market just like other shares.  In particular, you can invest in index tracker ETFs.

These are funds which represent and track the respective stock exchange index exactly – or near exactly. For example the Dow Jones, the London FTSE or the German DAX. You can also invest in funds that track indexes in the Far East.

The advantage of index tracker ETFs is that they are diversified investments, they’re highly transparent, and you can easily monitor the value of your investment, since the stock exchange index is easy to check in the media and online at any time.

Why not also invest in yourself?

Don’t forget another investment that could be worth looking into. Yourself.  Too many people fail to consider themselves as a good investment!

Do you have confidence in yourself, in your ability to achieve something in life? To build a business worth investing in, that can generate value and a decent income?

If you’re breaking out, if you’re no longer a plodding nine to fiver, living for your salary, your weekends and your retirement, then you should be putting your money or at least some of it into your own business activities.

Don’t forget to diversify!

The one thing I think you should always do is diversify your investments.  Never invest in just one project, in one asset or one business. When you diversify, some of your investments will do less well than others.  You only get to find out which after the event. That’s why it’s important to diversify – in order to reduce your exposure to risk.

I won’t get caught up in any private pension schemes again and I wouldn’t advise them for anyone else either.

Everyone should make provision for their old age. But private pension schemes are in my opinion not the best way to do it. I think private pensions are a dud deal.

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