My retirement pot is in cash, why should I invest with UK stocks at all-time highs?
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My SIPP holding is currently all in cash. Why should I invest now with the FTSE at such a high?
Simon
Paul Angell, AJ Bell Head of Investment Research, says:
Whether your SIPP (or other pension) is mainly invested in equities, bonds or cash should primarily be determined by how far away you are from retirement.
The benefit of having your money in cash is that you don’t risk losing your savings from a fall in the market. But keeping your money in cash creates significant risks as well, because cash can lose value due to inflation and relying on savings without stock market growth may not be enough to meet your goals in retirement.
For those more than 10 years away from retirement, there’s significant time for growth, and an ample chance for your savings to recover value in the case of a market drop. Once you get closer to retirement, there’s less opportunity for the market to recover, which is typically when people become a bit more cautious with their investments.
Historically, equity markets have massively outperformed cash in the long term. So, for investors who do have the time, equity investments could leave them with a much larger pension pot.
UK stocks versus the broader market
In your question, you ask specifically about the highs of the FTSE. But when diving into equities, it’s also worth considering investments abroad. This can help resolve some of the worries about high valuations of the FTSE, or any other market for that matter.
This is the approach we take in the AJ Bell fund range. By spreading our equities across the UK, emerging markets, China, Europe, Japan and the US, it diversifies our market risk, as these markets are exposed to all sorts of varying economic factors, as well as being made up of different types of businesses that themselves will be driven by different factors. This creates the opportunity for some better performing region to offset a region performing poorly, and to protect against an event that affects one market more dramatically than another.
For example, last February following AI progress in China surrounding DeepSeek, MSCI’s China index gained over 10%, while the S&P 500 (a proxy for US equity markets) lost 2.6%*. By being invested in both regions, you would have smoothed out the losses of the S&P 500 with the success of China.
This regional diversity allows for less reliance on a single market’s success while still having the opportunity to enjoy the growth that the equity market can bring.
Why is the FTSE so high?
It’s understandable that the FTSE’s all-time high would ring some alarm bells, especially after the UK’s economic malaise over the past few years.
However, many of the companies in the UK stock market are not actually dependent on a thriving UK economy. The stock market has therefore been able to have a really good run, as more traditional businesses like banks and defence companies have become more profitable amidst higher interest rates and increasing geopolitical tensions respectively.
How else can I value the market?
It’s important to actually look behind the FTSE’s headline valuation. One way to do this it to consider the market’s price relative to the earnings of its companies. When assessed in this light, the price of the FTSE All-Share being about 13.2 times the earnings currently, is actually within a very typical range for the market (which over the past 15 years has been as high as 16 times earnings and as low as nine times earnings**). Therefore, although the level at which you would be buying into the FTSE is now higher, you’re getting companies with better projected earnings than at lower FTSE levels.
Think of it like buying a sweet shop. You’re first offered the shop for £200, but the shop looks tired, the candy in the bins is stale and the shelves are heavy on liquorice and flake bars. Later, the shop gets a makeover, and the shelves are filled with Tony’s Chocoloney, bringing in much more business. The cost of the shop is now £500, but with much better prospects for the future.
With markets, as with sweet shops, it’s smart to be wary of prices that shoot up. But when those prices are backed by strong company revenues and balance sheets, it might just mean that there’s more growth potential for the companies, or they’re now being valued more fairly.
Investors nearing retirement
That said, if you are in the final years before retirement, you likely won’t want to risk it all on a sweet shop. Instead, this is when many people start holding more of their savings in cash. But it’s important to remember that your pension will have to last through your entire retirement, assuming there’s no other savings you plan to draw on.
Instead of going completely to cash, many choose bonds, or more risk-averse equity income funds to keep a flow of income coming into their account without drawing too heavily on their starting pension balance. If you have a sizeable pot, this can mean that the value of your pot continues to rise in your first years of retirement, as the withdrawals are not as large as the returns you are making on your investments. Some income funds, including the AJ Bell income funds, offer a monthly payment, which can allow you to stay in the same income rhythm as you had when receiving a salary.
*Source: FE Analytics, from 1 February 2025 to 28 February 2025
**Source: Refinitiv, 12-month forward looking PE ratios of the FTSE All-Share
Paul Angell: Head of Investment Research
Paul Angell is AJ Bell's Head of Investment Research. Paul began his investment career with a global investment bank in 2010, holding various roles across London and Hong Kong over the following years. In 2016...
