Advice for first time pension planner

jem16

mickflynn39 wrote: »

The TER probably covers an annual management fee but what about other charges like share dealing(covering brokers' commissions, price effects and bid/offer spreads on shares and bonds bought). Then when you take into account the initial cost of purchasing units, which is usually 5 per cent, you would be paying well over 0.3%.

Did you bother to go to the link I provided? There is no initial charge on this fund.

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=CPUKI&univ=U

TER includes all costs;

http://en.wikipedia.org/wiki/Total_Expense_Ratio

mickflynn39

hugheskevi wrote: »

So this would be a 4% return in a pension (£400/£10,000).

Yes

What is the source for this? 4% looks low. 5% would seem closer to the mark for an equity portfolio long term looking at long-run (over the last 100 years) return.

As I previously said 5.6 per cent is the rate for stocks and shares so you are right. Most pension funds though have averages around 4 per cent.



So charges reduce growth from 4% gross to about 1-2% net. Consistent with a TER of about 2-3%, is that right?

Yes.


It certainly would put a big hole in profits, but why would I have such a high charging pension? Across all of my own and my partner's ISA and pension investments, I can't think of any with a total cost of more than 1%, even taking into account dealing costs and buy-sell spreads.

From all these numbers, shouldn't the conclusion be that the real long-run return on equities is about 5%, a typical pension charge would be 1% TER, so I could therefore expect a long-run return of about 4% real? Admittedly you may argue that the long-run return has been fundamentally lowered in some way, as the last 20 years have been strange times. Even so, I doubt you'd reduce the expected return to much below 4% real (pre charges)?

If your TER is 1% you are right. However there are usually other 'hidden' costs. What about the initial commission for the pension salesman, share dealing charges (covering brokers' commissions, price effects and bid/offer spreads on shares and bonds bought). Also consider the initial cost of purchasing the units, which is usually 5 per cent and you will find you are paying more than you think. Sorry about the way my answers have been formatted. I don't know how to use the Quote function properly.

mickflynn39

jem16 wrote: »

Did you bother to go to the link I provided? There is no initial charge on this fund.

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=CPUKI&univ=U

TER includes all costs;

http://en.wikipedia.org/wiki/Total_Expense_Ratio

No I didn't. If what you say is true then it is indeed a very good deal. However I come from the school of thought that if it sounds too good to be true then it probably is. I'm sure the crafty bank will have some hidden catches somewhere to part you from your money. The small print on that deal needs reading very closely.

Judwin

You seem to be very mistrusting of finacial products - and that's probably a good thing. However, you shouldn't disregard everything just because there are some Shysters out there.

mickflynn39 wrote: »

Judwin, you mean well but 'past performance is no guarantee of future success'.

Obviously. However, you seem to be saying that the returns from savings Cash Accounts/Cash ISAS/ etc will exceed those from from the stock market. I don't believe that and only time will tell who is correct.

mickflynn39 wrote: »

If anything all the evidence points to the fact that funds that have performed well for a while are the ones more likely to start to perform badly.

Hmmm. I think "all the evidence" is a bit too strong.

First thing I decide is what markets do I think are going to do best in the next 5 years. THEN I decide which fund manager to entrust my money to.

If one thinks the FTSE is going to do best, but you don't like the idea of lining a fund managers pockets, perhaps the HSBC style trackers are for you. If you think fund managers can add value, then perhaps Invesco/Artemis/Neptune Income.

Me - I think emerging markets and BRIC wil do best. Volatile yes, but my oppinion is that there has to be a rebalancing of the worlds wealth from the developed west into these other markets. Therefore, I invest mostly in funds with exposure to these markets - Aberdeen Emerging, RCM BRIC, SWIP Latin America, etc.

mickflynn39 wrote: »

That added with the dealing costs, management charges etc. would mean he would probably be worse off than just staying put. He would certainly be worse off in the short term.

Replace your "probably" and "certainly" with "possibly" and I'd agree with you. It all depends on the funds available within the OP's pension, and whether there are any exit/MVR charges in place.

mickflynn39 wrote: »

Fund managers love nothing better than switching funds as it gives them a golden opportunity to get their hands on more of our money. I'd also check that 0.3% 'deal' before diving in as I would be amazed if there aren't any 'hidden' costs they are keeping quiet about.

As Jem says, if all you want is a FTSE tracker, then sub 0.3% "deals" are readily available.

DavidHayton

Here's my 2p worth ...

A pension is merely a tax-efficient wrapper around an investment. And a very good one as well. If you are a higher rate tax payer, for every £1 you put in, HM Government adds 67p.

If you don't like share-based products then there is nothing stopping you leaving your pension in cash deposits inside the pension wrapper (where all the interest is tax-free).

David

mickflynn39

I am very mistrusting of financial products and everyone else should be as well. The main motive of people selling financial products is to get as much money out of their customers for as little effort as possible. Maybe 1% of the industry is trustworthy but that's best case scenario.

When a company starts up a fund for the first few years they make an effort to grow the fund. Then they advertise heavily and attract a lot more money which then means the fund doesn't perform as well because it's too big and reverts to buying the usual shares all the other big funds buy. However they are not bothered because now they have a cash cow and can milk the fund with their management charges. That's why past performance is a good indicator of poor performance to come. You don't drive a car while looking in the rearview mirror all the time.

It's virtually impossible to pick funds that are going to do well in the future. Good luck to anyone who attempts it. It's a fact that index tracker funds beat 80% of managed funds. This shows most people are paying unnecessary fund management charges for worse performance than just getting a cheap index tracker.

Anyone thinking of starting a personal pension should consider the following facts:

To get a £15k inflation linked pension a pension pot of about £600k is going to be needed.

Over the last 5 years, 3.2 million of the aprox. 4 million people retiring had less than £30k in pension savings, meaning they'd get an inflation linked pension of about £1k a year. Of the remaining 800,000 retirees, around half had a pension pot of between £30,000 and £50,000 and only around 400,000 had a pot bigger than £50,000.

The reality is that 9 out of 10 retirees can expect an inflation-linked income of around £6,000 to £7,000 a year including the state pension.

Surely nothing more graphically illustrates that the pensions industry wildly overstates how investments are going to perform. This extra pension that people have struggled to save for has been a waste of time as they would have qualified for pension credits and other benefits that mean there was no point saving in the first place.

So before giving your hard earned money to the grasping financial industry do some simple maths first. Unless you can put aside aprox. 30 times the income you want in retirement then look at other ways to fund your retirement.

dtsazza

mickflynn39 wrote: »

The key point everyone considering a pension should consider is that unless you get very lucky your pension is only going to generate 1-2 per cent growth. Forget the 7 per cent they all advertise. The real long term figure is 5.6 per cent. In the 48 years since the start of the FTSE All-Share Index in 1963, shares have given an average of 11.8 per cent a year. If we knock off inflation of 6.2 per cent a year, the real return on shares drops to 5.6 per cent a year. Had we left our money in cash over the same period, we would have got an 8.5 per cent a year return or a real return of 2.3 per cent a year after deducting inflation. So the benefit of having money invested in shares, unit trusts or pension funds was just above 3 per cent a year. If we're paying one and a half or two per cent or even three per cent a year in charges, that will wipe out a large part if not all of our potential earnings from putting our money in a possibly risky investment rather than in a bank account.

You're not comparing like-with-like in your comparisons at all.

As you've said yourself in the block I quoted, the average return on shares was 11.8% p.a. Yes, there were inflationary forces at work during this time, but unless you specifically advocate investing in some sort of inflation-tracking instrument, all returns will be affected equally, so it's not correct to subtract inflation from one but not from another. In particular, the benefits of paying off a mortgage are equally subject to inflationary pressures.

Thus a more accurate comparison would be, say, 10.8% return for the shares historically (if you're investing in the all-share index you don't need an actively-managed fund, so you should almost certainly be able to pay less than 1% TER - as others have pointed out, right now the HSBC All-Share tracker is available with a 0.27% TER though I'm not going to assume that was always the case from 1963).

It's a fact that index tracker funds beat 80% of managed funds. This shows most people are paying unnecessary fund management charges for worse performance than just getting a cheap index tracker.

I completely agree. But index trackers are funds too! This isn't a reason not to start a pension, just a reason to pay attention to which funds you/it invests in. You can hold those HSBC index trackers in a pension, you know.

Of course, if you're good at identifying the 20% of funds that outperform the tracker you can have a punt at holding a few of those too. But that comes down to investment choice - the pension is just a tax wrapper, so can't be blamed for the good or bad performance of funds you choose to hold in it.

The reality is that 9 out of 10 retirees can expect an inflation-linked income of around £6,000 to £7,000 a year including the state pension. Surely nothing more graphically illustrates that the pensions industry wildly overstates how investments are going to perform.

This doesn't say much beyond that most people don't think about their retirement enough while they're young and earning. Due to compound returns, it's much easier to start your pot while you're young.

In fact, with the 10.8% figure from above, if you'd been contributing regularly to a pension for 40 years, you could amass the £600k pot referred to by contributing £44/month. This would mean total contributions of £26,400 and a pot of £629k on retirement. On the other hand, if you start saving with 20 years to go, you'd have to contribute over £700 a month (no typo) to get the same pension pot.

And these are the figures that actually end up in the account. If you're a higher rate taxpayer, and your company matches your contributions, you could have a £600k pension pot with 40 years of contributing £16.50 a month yourself (same amount from the employer, and £11 from HMRC). This means that over the years you'd have paid in just under £8,000 and yet you'd have a £600k pension pot to retire on.

So with regards to your closing comment:

Unless you can put aside aprox. 30 times the income you want in retirement then look at other ways to fund your retirement.

Just remember that you don't have to come up with that amount of money yourself. Matched contributions (if available), tax rebates and compound interest can do the vast majority of the work for you (98.7% in the case above).

But it is important to start planning for retirement as early as possible, since at that point even tiny contributions can balloon into large final pots.

mickflynn39

You're not comparing like-with-like in your comparisons at all.

Yes I am. I did subtract inflation from shares and cash.
11.8% share growth less 6.2% inflation = 5.6% growth.
8.5% cash growth less 6.2% inflation = 2.3% growth.
Therefore the difference in the growth of shares and cash is 3.3%. You then need to deduct the various management charges from this 3.3% and you quickly realise that the perceived wisdom of investing in shares is nowhere near as good as the financial industry would have you believe.

edinburgher

what about other charges like share dealing

The example was a low TER fund - you don't have share dealing charges when you invest in a fund, only when you invest in shares

mickflynn39

dtsazza, you are either a financial adviser or one of them has done a very good number on you. Are you really saying that 90% of people who have invested in a personal pension are all incompetent? The truth is that they've been lied to by our dubious financial industry.

£44 a month is nowhere near enough to get a pot of £600k. You seem to be competely overestimating the growth of your pot and ignoring the devastating effect of inflation. Allowing for inflation and management charges the average real growth of pension funds is 1-2%. My projections were based on reality and based on personal pensions only. I would always advise people to join an employer scheme where the employer contributes. So my argument stands. If you want a pension of £15k a year you will need to put aside £450k in real money. The growth of your pension pot and the tax relief on your contributions should mean you get to a pot of about £600k. Obviously a higher rate tax payer will be able to put less away but it will still be a considerable amount. How many ordinary workers can put away £450k with the cost of living as it is. Not many. That's why 90% of them are receiving such low pensions. You're figures really are fantasyland and don't bear a moment's scrutiny. I hope you don't think I'm being rude I just want people to be aware of what they are letting themselves in for. Unless you can put away a lot of money then personal pensions really do not stack up.