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MSE News: Warning over charges that 'wipe millions off pension pots'

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  • zagfles
    zagfles Posts: 20,363 Forumite
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    gadgetmind wrote: »
    Yes. Increasingly the investments within asset classes track each other, and active management and stock picking are minor noise on a big signal. A few well chosen trackers and ETFs will deliver much of what you can do with UTs/OEICs with lower ongoing fees.

    Sorry - by "underlying assets" I meant the funds rather than the equities. (Don't really want to get into a debate about this - have had lots of heated debates in the past - but I'm a strong believer in good active management being worth higher charges, if you seek out the best managers - on average my actively managed funds have certainly outperformed the relevant index)

    Is it possible to get the same funds at significantly lower cost?
  • jamesd
    jamesd Posts: 26,103 Forumite
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    How easy would depend on the platform (=product) used. I don't know enough of them to comment much on it.
  • dunstonh
    dunstonh Posts: 116,696 Forumite
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    Will MSE now run an article that the FSA have said that the research and extrapolation from Consumer Focus was flawed?

    http://www.moneymarketing.co.uk/regulation/fsa-told-consumer-focus-that-pension-churn-survey-was-flawed/1037777.article#commentsubmitted
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • dunstonh
    dunstonh Posts: 116,696 Forumite
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    I cant find the other thread that was on the subject of charges. However, another survey was done last year and published in September. It was about "high" charges on some plans. It was researched by money management and most newspapers carried it along with the usual "charges are bad" mantra.

    http://www.telegraph.co.uk/finance/personalfinance/pensions/8780399/Fees-knock-25pc-off-the-value-of-your-pension-fund.html

    Well it turns out that the research for this one was also flawed. They worked out charges by taking the mid rate projections on example illustrations from providers and compared them against 7% without charges. Problem was that some providers have stopped using 7% as the mid rate figure and now use 6% or lower (they use rates which reflect the growth potential of the fund rather than a one size fits all rate). The lower rate used was not factored into the research. So, a pension that used 6% as their growth rate example was compared against that 7% and the difference was put down to charges. A clearly incorrect assumption and very amateur error.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
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    OK, if you think 25% is wrong, what percentage of your typical pension fund has been eaten in charges by retirement age?
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • dunstonh
    dunstonh Posts: 116,696 Forumite
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    gadgetmind wrote: »
    OK, if you think 25% is wrong, what percentage of your typical pension fund has been eaten in charges by retirement age?

    Impossible to calculate as we dont know the impact of inflation.

    What tends to happen in the media is that they look at charges over the term, lets say 30 years, then treat it as if its all in todays money. It is not. A charge of £1,000 in 30 years is much lower than a charge of £1000 today.

    So, taking the total charges over the whole term and presenting it in todays terms without any correction for inflation creates a biased outcome.

    Or for those not following, Your pension may be showing a projected value of £500k in 30 years and a charge for that year may be £5000. However, £500k could be the equivalent of £100k today and £5000 the equivalent of £1000. Yet the media would present that £5000 charge as being the same in spending power as £5000 today.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
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    dunstonh wrote: »
    Yet the media would present that £5000 charge as being the same in spending power as £5000 today.

    So let's work in percentages. If a pension pot would build to £500k with a 0.5% TER, what percentage of that £500k would the punter have if the annual fees were 2%?
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
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    OK, I stopped being lazy and used the HL calculator. I worked on a 20 year old putting in £116pcm (rising with wages), and 7% annual growth. Final pot is around £500k so a £21.5k pa annuity.

    Crank the fees up to 1.5%pa and the pot shrinks to £377k and the annuity to £16.4k.

    That's roughly 25% extra taken out of the pot in fees so the punter gets to retire on 75% of their income while the investment industry retires on the other 25%.

    At the (very optimistic!) default of 1%, the amount lost in fees is 14%.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • dunstonh
    dunstonh Posts: 116,696 Forumite
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    edited 3 February 2012 at 3:53PM
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    At the (very optimistic!) default of 1%, the amount lost in fees is 14%.

    Why is 1% optimistic. It has been the benchmark since 2001. Yes you can go higher and in many cases it is better to do so. However, you can go cheaper as well.

    The problem is that you are taking a charge based on FUND VALUE and placing it against CONTRIBUTIONS paid and not factoring inflation into it. You are also treating the amount the charge would have grown by had it not been taken as a charge when it isnt.

    The problem is that if you start treating all profit and charges like this over a lifetime you would have to stop living. Lets apply this to retail and see how it looks.....
    Supermarket takes about 16% of what you pay in profit on average (pension looks cheap at 1%). So, if supermarket didnt take that money off you each week for the next 35 years and I then invested that at 7% a year you would be so much better off. Lets see how much.

    On 10k spending a year, supermarket makes £1600. (ignoring inflation so the figure stays that each year for 35 years)
    Supermarket charge is £144,512 over 35 years
    However, if you applied the method used by you and the media, you would take that charge and add 7% for each year and that comes to £221,179.
    You then take that £221,179 and compare it against what you have paid which is £350,000.

    So, what the media would then say is that the supermarket takes 63% of what you pay them over 35 years as profit.

    They clearly dont and you wouldnt dream of showing it like that. However, it gets shown like that for pensions.

    Or lets say a builder does a job that costs you £1000 (ignoring materials) and that job is good for 35 years. If you hadnt paid that £1000 and invested it at 7%, then at the end of 35 years you would have £10,676. So, lets call the builders charge £10,676.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
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    dunstonh wrote: »
    Why is 1% optimistic.

    Because few IFAs seem to steer people into pensions with charges that low. This is based on both my personal experience and observations of what others mention here on pretty much a weekly basis.
    The problem is that you are taking a charge based on FUND VALUE and placing it against CONTRIBUTIONS paid and not factoring inflation into it.

    No I didn't. I used the HL pension calculator to look at the end result based on various levels of annual fees, nothing more, nothing less. All the punter cares about is how much pension he'll get for his contributions, and as we've seen, this is very sensitive to fees.
    They clearly dont and you wouldnt dream of showing it like that. However, it gets shown like that for pensions.

    Maybe, but that *isn't* what *I* did. I ignored contributions and just looked at the end result, which is what I have personally always cared about.

    I took 0.5% fees as baseline and 1% fees give a final pot that 14% smaller while 1.5% fees give a pot that's 25% smaller.

    Of course, someone might argue that higher fees give more annual growth, but that's have to backup this claim with multi-decade back-tested data, and this data would have to correct for many factors including survivorship bias.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
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