Advice for first time pension planner

mickflynn39

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

The point I was trying to make is that quite often there are hidden charges. The TER doesn't always tell the whole picture. For example my Legal and General pension quoted me a TER of 0.75% but when I pushed them further they told me they also take out £3 a month. This figure goes up every year. Now that I've got myself clued up about how these companies are ripping us off a transfer will be happening very soon to a low expense tracker fund via a SIPP.

Judwin

There are two types of 'charges' associated with pensions and ISA's.

Firstly, the 'wrapper' provider has charges - this is the £3 per month in your L&G case. If you're only investing £10 per month, then yes, this charge is a huge drag on growth. If you're investing £300 p/m, then it's only 1% - which is ballpark for most modern persional and stakeholder pensions. If you transfer into a SIPP, then chances are there will be charges for the SIPP wrapper by whoever provides it,

Secondly, the funds you invest in within the wrapper have their own charges - this is the TER of 0.75%. As has been explained, you could reduce this to less than half that.

If I accept (and I don't) your growth figures that investments will grow at a rate of 2% faster than cash, then if you start a pension at 20, and retire at 68, then 2% compouned over 48 years means you pension pot will be worth 2.58 times what it would have been if you'd just used cash savings to provide for your retirement.

With current savings rates at 4%, and investment returns (after all costs) of 10%, over 48 years its more like 16 times the cash return.

I'll also accept your figures of needing a pension pot of £600K to provide a pension of £15K p/a, although that's an annuity rate of 2.5%, which is a little low. But - what is your alternative? Are you saying you want to live on £5K state pension, and whatever state handouts you can get?

mickflynn39

QUOTE]If I accept (and I don't) your growth figures that investments will grow at a rate of 2% faster than cash, then if you start a pension at 20, and retire at 68, then 2% compouned over 48 years means you pension pot will be worth 2.58 times what it would have been if you'd just used cash savings to provide for your retirement.

With current savings rates at 4%, and investment returns (after all costs) of 10%, over 48 years its more like 16 times the cash return.

My figures show what has happened in the past and can be easily checked and confirmed. I don't say that this is what will happen in the future. Things could improve or indeed may get worse. I personally think they will get worse due to the unregulated nature of the financial markets, massive government debt, natural disasters etc. My main point is that people have been misled into thinking that they are going to get fantastic pensions due to the financial industry exagerating the potential returns. It's a fact that pensions have on average grown by only 4% over the long term before management expenses giving a real return of only 1-2% in most cases. I accept that there are now low TER index tracker funds so potentially the fund value should not be eaten away by these charges as much as they were in the past.

dtsazza

mickflynn39 wrote: »

dtsazza wrote:

You're not comparing like-with-like 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.

I don't disagree with the 3.3% figure, but what you've calculated there is something like the Equity Risk Premium - that is, the difference in returns between investing in shares and investing in cash-based products.

But you then go on to use this figure (fee-adjusted to 1-2%) as if it's the actual returns you'd get on equity investment. You claimed that you should pay off the debts so long as their interest was higher than 1-2%. But if you invest £1000 in paying off e.g. a 5% mortgage, your effective return is 5%. If you that same money invest in equities, your effective return is 11.8%, by the figures you quoted above.

The degree to which equity return beats cash returns is irrelevant when you're comparing equities against debt repayments. That's what I meant when I said you weren't comparing like-with-like.

£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%.

Yes, that was a rather unfortunate typo - I meant £74

That said, I agree I was ignoring the devastating effect of inflation, for the same reasons as before - it affects all asset classes equally. If you decide that perhaps you need to save £1.2m in today's money, then you'll need to double the monthly pension contributions to hit that - but you'd need to double the amount invested in any other financial instrument too. Therefore, whether a pension is a better choice than X/Y/Z for retirement provision is unchanged, whether you multiply both sides by the same inflation figure or not.

And as mentioned above, your "real growth" figure is actually the extent to which equities do better than cash investments. Hence the claim that you need to invest £450k to get £600k is not the case; it's more accurate to say that you need to invest £450k to get the same end amount you'd have got from investing £600k in cash products. (This specific difference corresponds to a growth premium of 1% for 28 years, or 1.5% for 19.3 years, or 2% for 14.5 years, just to give some concrete figures. If you go with an HSBC index tracker and so have a difference of 3%, and invest for 40 years, the shares will be worth 3.26 times as much as an equivalent cash pot.)

If you want a pension of £15k a year you will need to put aside £450k in real money. 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.

I still disagree with the 450k figure, because you're using the wrong figure for the calculations. To get a £600k pot today, here's what you would have had to invest starting different numbers of years ago, assuming 10.8% growth (i.e. 1% fees), basic rate tax relief and no employer contribution:

Years   £/month    Total invested
 40        59.38      28,504.32
 35       102.66      43,118.88
 30       178.77      64,356.48
 25       315.30      94,591.20
 20       569.34     136,642.56
 15     1,075.54     193,596.48
 10     2,237.78     268,534.08
  5     6,068.55     364,113.12

I daresay that even with the cost of living as it is, most people could manage to put away less than £60 a month, if they realised what it would mean for them in retirement and realised early.

Unless you can put away a lot of money then personal pensions really do not stack up.

I disagree with that, as the worth of pensions scales linearly - put in twice as much, and it's worth twice as much at the end. It's not like some instruments whereby fixed costs make them irrelevant for small real values.

Besides, if you can't put a lot of money into a pension, you can't put a lot of money somewhere else - I don't see an alternative proposal that would be more profitable. If you don't save at all, you'll just have to get by on the state pension... :eek:

mickflynn39

I'll also accept your figures of needing a pension pot of £600K to provide a pension of £15K p/a, although that's an annuity rate of 2.5%, which is a little low. But - what is your alternative? Are you saying you want to live on £5K state pension, and whatever state handouts you can get?

I accept that 2.5% is little low at the moment. But with increasing life expectancy it may well be very accurate in many years to come. There are many alternatives. All I want to point out to people is that saving in a personal pension plan is not for the majority of us going to provide anything like the financial industry would have us believe. I have invested £13,000 in solar pv roof panels. This should generate me aprox. £100 profit every month for the next 25 years in real terms. I also have a buy to let property which cost me £40,000 and is generating £350 per month in profit. It has also more than doubled in value. I also plan on working part time for the rest of my life as a guitar teacher. I've turned one of my hobbies into a job and currently earn £400 per month from this. I'm also a professional gambler and am currently earning on average over £1500 per month from this. I retired at 50 without a pension and now have a much better quality of life.

Judwin

mickflynn39 wrote: »

My figures show what has happened in the past and can be easily checked and confirmed. I don't say that this is what will happen in the future. Things could improve or indeed may get worse.

Your figures may be correct for an L&G pension fund invested in the L&G FTSE tracker. But L&G aren't the only provider, and FTSE trackers aren't the only pension funds available. So tarring all pensions with the same brush is wrong.

mickflynn39 wrote: »

I personally think they will get worse due to the unregulated nature of the financial markets, massive government debt, natural disasters etc..

You may be right, you may be wrong. But what is your alternative - all these things will also affect cash savings to a greater or lesser extent.

mickflynn39 wrote: »

My main point is that people have been misled into thinking that they are going to get fantastic pensions due to the financial industry exagerating the potential returns. It's a fact that pensions have on average grown by only 4% over the long term before management expenses giving a real return of only 1-2% in most cases.

I don't doubt that some have been misled. But the VAST majority have just misunderstood. Pension illustrations used to give illustrations of what your fund MIGHT be worth if they grew at 5%/7%/10%. There was never any promise that they WOULD grow at these rates. There is a world of difference between MICHT and WILL.

edinburgher

Quote:
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

The point I was trying to make is that quite often there are hidden charges. The TER doesn't always tell the whole picture. For example my Legal and General pension quoted me a TER of 0.75% but when I pushed them further they told me they also take out £3 a month. This figure goes up every year. Now that I've got myself clued up about how these companies are ripping us off a transfer will be happening very soon to a low expense tracker fund via a SIPP.

If you think there are hidden charges (and some of the examples you provide have been discounted by other posters), fair enough. But it's one thing to talk about tacked on charges and another to specifically mention charges that can't possibly apply to the sort of investment being discussed!

I agree with you that we need to keep our wits about us when choosing financial products and planning for the future, but I also think that you have a bit of an axe to grind and that if we want a fair and reasoned discussion we need to talk in specifics, not general conspiratorial grumblings

mickflynn39

dtsazza, you can't ignore inflation. Your growth rate projections look a little optimistic to me and your huge totals after 40 years would look nothing like as good after allowing for inflation. I stand by my original premise. You need to put away approx. 30 times the size of pension you want to receive (not applicable to higher rate tax payers). When I say 30 times I mean in real terms so your contribution goes up every year in line with inflation. So £450k in real terms just to get a pension of approx. £15k is going to be well out of the reach of most people. If pensions were so great and provided such a great return why are 90% of the 4 million that retired in the last 5 years only getting £1-2k a year? Surely this proves that the growth projections of the financial industry are way too optimistic and the effect of inflation and management charges are totally underestimated.

Judwin

mickflynn39 wrote: »

If pensions were so great and provided such a great return why are 90% of the 4 million that retired in the last 5 years only getting £1-2k a year? .

Because they only put in thruppence-hapeny a month. If they'd put a shilling in instead, then they'd be on 5K per year.

mickflynn39

Your figures may be correct for an L&G pension fund invested in the L&G FTSE tracker. But L&G aren't the only provider, and FTSE trackers aren't the only pension funds available. So tarring all pensions with the same brush is wrong.

I never said that my figures were based on L& G. My figures are the average of all UK based pension funds whether they invest only in the Uk or abroad and include trackers and actively managed.