What is a realistic annual growth rate for stakeholder pension?

MrMartyn

Whenever I see projections of what kind of retirement income a stakeholder pension might provide, they usually seem to assume that the annual growth rate will be either 5% or 7% or 9%.

Since my pension is based on a FTSE All-Share index tracking fund, I've been looking at the dividend yield to get some idea about the level of growth.

Dividend yield information has been surprisingly hard to find, but I did see a figure of 3.04% quoted recently. I can't remember whether that was for FTSE 100 or FTSE All-Share.

Obviously I would hope that the share price would increase, providing some extra growth, but considering how miserable the FTSE performance has been over the last 10 years, I'm inclined to think that dividend re-investment is where the vast majority of the pension pot growth will come from.

The question is, what is a realistic level of annual growth to hope for nowadays from a FTSE All-Share index tracking fund (and for the next 20 to 30 years until I retire)?

Thanks,
MrMartyn

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability for anything I post here.

dunstonh

Whenever I see projections of what kind of retirement income a stakeholder pension might provide, they usually seem to assume that the annual growth rate will be either 5% or 7% or 9%.

They are the old FSA mandated rates. Providers can go lower but cant go higher.

In simple terms, the 5% is a guide for cautious, 7% for balanced and 9% for adventurous. That is just a rough guide though.

The question is, what is a realistic level of annual growth to hope for nowadays from a FTSE All-Share index tracking fund (and for the next 20 to 30 years until I retire)?

For medium high you would "like" to have somewhere around the higher rate figure. However, for 100% investing in UK equity (which is poor quality investing) then you are probably looking at more like the middle rate at a guide.

utigers

The L&G All Share Index Tracker has an annualised performance of 4.41% since its launch date in 1997.

Doesnt seem much??

dunstonh

utigers wrote: »

The L&G All Share Index Tracker has an annualised performance of 4.41% since its launch date in 1997.

Doesnt seem much??

Reasons for that:
1 - Labour Govt - Typically the UK stockmarket under performs during a Labour Govt. This last one was no different as the UK was the worst performing western market in that period.

2 - You have two 43% sized market drops in that period yet only one full recovery and growth period. You are effectively showing 1.5 cycles rather then two complete cycles.

3 - You didnt invest all your money in 1997. When you contribute monthly, you average out those ups and downs. The two major downturns in the last decade could be very good news for those who kept paying into them through the bad times. If you started your regular contributions from launch then you would have got 5.785% after charges (so the 7% projection would be nearest match as that is before charges. 7% minus 1% charge = 6%)

4 - That fund didnt launch in 1997 (you may not have the same version). It launched in the 80s but has had a number of variations depending on the contract. The UT version is from 1995. If you invested £100 on 31st Jan 1995 in that fund you would now have £323.81 (at close of business on friday). That is an annualised return of 7.6%

Those extra two years actually give you almost a complete double cycle. If you put the £100 in on 31/1/1997 then you would have £215.73 which is an annualised return of 5.65%.

5 - as already said, that is poor investing as its 100% in one sector. Could you imagine going 100% Japan? No. So, why are you doing it with 100% UK?


edit added to above. The 1987 version of that fund paying £100pm would have £76,800 now. That's an annualised return of 7.464% after charges. So, its actually closer to the 9% projection figure than the 7% one.

Loughton_Monkey

Sticking to a UK All Share Tracker keeps your charges down, but could probably [opinion] be about the worse place to invest.

FTSE100 is often a bad thing - because it contains a weighting of 'mature' companies - well past their sell-by date - who can only go down.

FTSE All Share contains these, as well as the newer smaller companies - many of which fail.

If you must invest in the UK, then FTSE 250 is probably the best vehicle.

Personally, I prefer to invest in places where there are 'growth' prospects. UK Industry serves very well to 'shovel around' the dwindling UK wealth-pool. The better half of companies will grow. The poorer half will fail or dwindle. So you need to be a very good 'cherry picker' to succeed.

Countries with a population who still 'work' [at wealth creation - not pen pushing or sandwich making] are set for growth for the foreseeable future as far as I can see. China finds it difficult (for instance) to keep its GDP growth down below double digits - a large and growing part of which is manufactured exports. There are many countries with strong and growing export markets, and loads of natural resources. Sadly, the UK is not one of them, and most unlikely to be so again in our lifetime.

CLAPTON

remember that the ftse100 peaked about 7000 in 2000 and now it's 6,000

remember that the ftse100 although a UK index comprises mainly international companies (i.e. those with international earnings) BP,Shell, HSBC, PRU, Glaxo etc etc

MrMartyn

Thanks for all your comments on this thread.

I recently saw a figure quoted in a newspaper for the "yield" of the FTSE All-Share, and it was something like 2.91%. I would imagine that pretty much every single day there will be a dividend being paid by one or more companies that make up the FTSE All-Share (since there are hundreds of companies in the index), so does the 2.91% yield figure refer to the average dividend yield for the year leading up to that day? If so, that seems a pretty poor yield, considering that inflation is 4 or 5 percent even according to the official measures (which are probably under-estimates). At that rate, assuming that the underlying share prices of the index didn't grow much (or at all), then a FTSE All-Share tracker could be falling behind due to inflation. Am I missing something here? I thought the stockmarket & index trackers were supposed to be better than cash deposits over the long term?

Thanks,
MrMartyn

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability for anything I post here.

CLAPTON

MrMartyn wrote: »

Thanks for all your comments on this thread.

I recently saw a figure quoted in a newspaper for the "yield" of the FTSE All-Share, and it was something like 2.91%. I would imagine that pretty much every single day there will be a dividend being paid by one or more companies that make up the FTSE All-Share (since there are hundreds of companies in the index), so does the 2.91% yield figure refer to the average dividend yield for the year leading up to that day? If so, that seems a pretty poor yield, considering that inflation is 4 or 5 percent even according to the official measures (which are probably under-estimates). At that rate, assuming that the underlying share prices of the index didn't grow much (or at all), then a FTSE All-Share tracker could be falling behind due to inflation. Am I missing something here? I thought the stockmarket & index trackers were supposed to be better than cash deposits over the long term?

Thanks,
MrMartyn

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability for anything I post here.

let's suppose the yield on FTSE allshare rose to 10%
now think very very very careful

-would the price of the FTSE share rise or fall?
-if they rose what would happen to the yield?

dunstonh

I thought the stockmarket & index trackers were supposed to be better than cash deposits over the long term?

They do in most periods. You are looking at just one part of the equation. Also, remember that some companies focus on share price whilst others focus on dividends. So, when you look at the average you are not really getting the full picture.

A typical balanced managed fund (which will rarely be the best option from a growth point of view but rarely the worst) has achieved in excess of 7% p.a. over the long term. 100% investing in UK equity would not be considered quality investing.

Linton

The yield is the average dividend over the year. You are not overall looking for dividends to beat inflation, unoess you are a focussed income investor. Some people take the view that high dividends are undesirable in that they imply that the company paying them is saying that there is nothing better they could do with the money. If the company isnt prepared to invest money it controls in its own expansion why should anyone else.

Not quite my view, but there is a point.

Stock market (and some index trackers if you chose the right index) can greatly outperform any other form of investment. But to do that you need to invest intelligently. Putting all your money in what is in my view a poor growth investment such as the FTSE100, FTSE350 or FTSE Allshare is not intelligent investing.

Almost exactly 10 years ago we were at the height of a bubble. The FTSE100 was dominated by vastly inflated tech companies, several of which were small and had never made a profit. They crashed. That is the nature of the FTSE indices. Just like they were dominated (or at least heavily invested in) the banks 5 years ago.

On your question on what growth you can realistically expect from a FTSE allshare tracker - no idea. Say 5% annually with +- fluctuations of 30% likely.