Whats the right thing to do when RePensioning

MoneyMad

Hi,
I have read the article on re-pensioning but I am still not sure what I should do! Basically my IFA has advised me to move my Pension to better performing funds. I have three quotes to chose from BUT they all have some really hefty charges! lets say I retire in 15years and have potentially 150K at retirement calculated at 5% growth, there is about 50K in charges (thats 25% over the period) out of which they pay the IFA about 3K, This all seems a bit too much! why does it cost so much to manage a pension? I can guarantee the charges wont reduce if the fund managers do not perform. Are there better places to put a pot of pension money into so that it works more for you than the managers?

dunstonh

BUT they all have some really hefty charges!

what do you class as hefty?

lets say I retire in 15years and have potentially 150K at retirement calculated at 5% growth, there is about 50K in charges (thats 25% over the period)

Thats future money terms. Not todays terms.

why does it cost so much to manage a pension?

Typically it doesnt. Normally its around the same as a savings account. Only difference is one tells you the charges, the other doesnt.

I can guarantee the charges wont reduce if the fund managers do not perform.

How can you guarantee that? Lets say the fund house gets 0.3% of the annual charge. Do they get paid more if the fund is £10 million or £100 million? If the fund goes down in value do they get more or less?

Are there better places to put a pot of pension money into so that it works more for you than the managers?

You havent told us anything about what you have been recommended. So, we cant tell if there is better or not.

feesarefare

MoneyMad wrote: »

Hi,

I have read the article on re-pensioning but I am still not sure what I should do! Basically my IFA has advised me to move my Pension to better performing funds.

What make of crystal ball is your IFA using?

I have three quotes to chose from

How does that work?

feesarefare

You havent told us anything about what you have been recommended

3 quotes!

So, we cant tell if there is better or not

If a recommendation had been made how would yo be able to tell if its better?

Loughton_Monkey

You have chosen to employ an IFA. This does cost money but it is visible.

With pensions, though, by far the biggest charge is management charges of the funds. Were you to go to someone like HL or Cavendish, you could obtain access to thousands of funds, each with charges. Most of them, however, would be similar charges to that which you are paying. It is perfectly possible do user 'cheaper' funds such as index trackers etc. There has always been a huge debate as to whether or not these produce overall results better than a 'managed' fund or not.

I think most people share the view that charges on fund management (whether the funds are in pensions or ISA's or just simple investments) are large but currently that's the 'market' I'm afraid. At least they are based upon fund value, and therefore the £amount paid (and received by them) varies with success or failure.

Although I would not recommend it for yourself, there is an arrangement called a 'SIPP' which is a self-invested pension, where you can basically elect to manage all investments personally. This can be cheaper, or more expensisve, depending on how much you value your time.

MoneyMad

Thanks for all your replies, Just to make it clear, I am not complaining about the charges my IFA will be getting as a result of me repensioning, I am happy with my IFA, albeit the advice is costing a little higher than i might have liked. The point I was trying to make was, how much the fund managers stand to make as a result of me opting for one of the funds recommended to me.

If the general concensus is that the charges are pretty normal and there is no real way to get around them without optiong for for a SIPP (which i do not have time to do anyway). From what i am reading it sounds like they are all roughly the same which ever way i look at it. If there was a better way of investing for retirement that would get around losing 25% of the fund as charges to the fund managers then i'd be interested to hear.

Thanks again.

dunstonh

The point I was trying to make was, how much the fund managers stand to make as a result of me opting for one of the funds recommended to me.

On the most common charge of 1.5% p.a. the fund house gets around 0.7% of that. The platform/provider gets around 0.3% and the IFA gets 0.5%. (generalisation and there is often cross subsidy in effect as well).

If the general concensus is that the charges are pretty normal and there is no real way to get around them without optiong for for a SIPP (which i do not have time to do anyway).

Using a SIPP for managed funds is typically more expensive than personal pensions. Indeed, take the HL SIPP, they keep the chunk that the IFA is paid and dont provide any advice. Only if you use a SIPP for what it is meant for (and since A day over 90% of people dont) are you likely to save money on costs.

If there was a better way of investing for retirement that would get around losing 25% of the fund as charges to the fund managers then i'd be interested to hear.

You are not losing 25% of your fund in charges. Typically its around 1 to 1.5% a year. Saying you lose 25% is a bit like saying Tescos cost you nearly a million pounds because you have to buy your food from a supermarket. 1) the cost is over the term. So, £1000 in 40 years time doesnt have the same impact as £1000 today. 2) the effect of charges is compounded on illustrations. i.e. they add 7% to the charges each year and compound it. So, that figure is not the actual charge. 3) you can grow your own food. Its cheaper (but not always) but more work. Same applies to investing or any other area of DIY. Build your own extension and you save the builder cost. Service your own car and you avoid the mecanic cost.

MoneyMad

Just so that I am clear about what you are saying, the figures i see on an illustration e.g. amount to invest 70K, effect of charges 30K and 120K as the figure on maturity after charges. All of these are not reflecting the possible Return or Charges! i know it might be an illustration but that is what I am lead to believe my pension might be worth (a bit more or a bit less), but ultimately i see these figures and think 30K in charges and 120K as what i might get when i retire, so if i do the math i make it about 20% which i admit is over a 15year term which works out on ave. as 1.3% per year which does not look too bad.... its just those final figures which makes me cringe. But I guess what I should be doing is looking at what I might get compared to leaving it in a poor performing pension plan, so the higher charges are reflective of the possible better returns.

Damask

The effect of charges isn't the same as the actual charges. The "effect" is because the charges already taken aren't there to get any investment growth - so it's trying to show you what would be there had there been no charges.

Over a 15 year term I would expect the actual charges to be a bit over three-quarters of the effect.... so about £23-24K actual.

dunstonh

ultimately i see these figures and think 30K in charges

Its a common mistake. You are also seeing it in todays money but its not shown in todays money. Its shown in future money terms as its over the whole therm. Not on day 1.

so if i do the math i make it about 20% which i admit is over a 15year term which works out on ave. as 1.3% per year which does not look too bad

If you take the 7% p.a. return figure (which is reasonable) you should make around 6% a year on that basis.

There was some talk of the FSA removing the "effect of" column due to it being frequently misunderstood. Nothing seemed to come from that though.

feesarefare

MoneyMad wrote: »

Just so that I am clear about what you are saying, the figures i see on an illustration e.g. amount to invest 70K, effect of charges 30K and 120K as the figure on maturity after charges. All of these are not reflecting the possible Return or Charges! i know it might be an illustration but that is what I am lead to believe my pension might be worth (a bit more or a bit less), but ultimately i see these figures and think 30K in charges and 120K as what i might get when i retire, so if i do the math i make it about 20% which i admit is over a 15year term which works out on ave. as 1.3% per year which does not look too bad.... its just those final figures which makes me cringe. But I guess what I should be doing is looking at what I might get compared to leaving it in a poor performing pension plan, so the higher charges are reflective of the possible better returns.

Why are you asking these questions after you have seen an IFA ? What exactly did you talk about when you met Him/her?