What to do with with profits funds?

puk999

Update: I opened a SIPP today. The with profits funds mentioned will be transferred into that new account. For the moment I've chosen some trackers for the bulk of the money, with a smaller slice going to riskier investments. Feel a bit more in control of things now which was the main purpose for me. I'm confident it'll be the better move in the financial long term too.

FatherAbraham

puk999 wrote: »

My other account is one that my employer and I pay into and holds "normal" funds that I reevaluate periodically. It's got £18k in. I much prefer this account as I have freedom to swap funds around. I'm also happy to take on a bit of risk and be responsible for the consequences (good or bad). I find the with profits to be too opaque, conservative and inflexible.

These aren't necessarily good reasons to terminate the WP investment: in particular, you can compensate for the conservativeness of the fund elsewhere in your portfolio. Adjusting the flexible parts of your asset mix to compensate for the unsuitability of the investment policy of the inflexible part is a far cheaper way of achieving the goal.

Good reasons to leave the WP would be improving the outcome for the same costs, or being able to achieve the same outcome for less money.

The WP should be considered in the context of your entire portfolio. Having too much assigned to cash-deposits is a bigger source of under-performance for many individuals.

puk999 wrote: »

I'm considering getting out of these with profits funds. When I spoke to SL a couple of years back they mentioned I might lose money by transferring. I'm looking for advice/opinions on how to determine what I'll lose, whether I should do that or just leave them. At the moment I don't feel informed enough. The figures suggest to me that if I transferred out today, I'd get £53,749.38 to put into other funds, right?

What matters is whether the spread and magnitude of possible outcomes at maturity is better for your needs within and without the WP investment. You don't seem to be analysing that, which is a shame, because it should be the driver for your decision. It's not just about costs.

I'm surprised that you haven't given more weight to modelling the effect of any terminal bonus likelihood.

Warmest regards,
FA

dunstonh

puk999 wrote: »

Update: I opened a SIPP today. The with profits funds mentioned will be transferred into that new account. For the moment I've chosen some trackers for the bulk of the money, with a smaller slice going to riskier investments. Feel a bit more in control of things now which was the main purpose for me. I'm confident it'll be the better move in the financial long term too.

That is a pretty big jump up the risk scale. Whilst I am not a particular fan of with profits, it does have some protections in place, the asset mix is more towards cautious to medium risk and one of your funds had a guaranteed minimum growth rate.

Being in control means knowing what you are doing and why and the consequences. You have gone from a fund where only the final bonus was at risk of a loss and had a guaranteed growth on part of it into index trackers with 40% or so discrete loss potential and possibly more depending on what these higher risk funds are.

You have no more control over the investments than you had on the existing contract. Both see the investments managed by either a manager or computer. Not you. Both had multiple funds available on them for you to select. Your control is only down to the funds you select. Vanguard manage Std Life index trackers. So, if that is your fancy, then you could have done it within Std life (caveat being that we dont know which version of the Std Life contract you have - most have them available. some did not)

One option could have been to remain with Std Life. Keep the guaranteed growth WP fund and fund switch the other into alternative funds. Therefore giving you the benefit of having the cautious side of the portfolio covered by the WP fund allowing you to adjust risk and volatility with the other unit linked funds you could have selected.

The SIPP may end up more expensive as well. If it is not a company that is priced for the 2014/2016 changes then you could find yourself paying more when they move to that compliance.

puk999

FatherAbraham wrote: »

These aren't necessarily good reasons to terminate the WP investment: in particular, you can compensate for the conservativeness of the fund elsewhere in your portfolio. Adjusting the flexible parts of your asset mix to compensate for the unsuitability of the investment policy of the inflexible part is a far cheaper way of achieving the goal.

The main driver was performance. Watching the transfer value grow over the last couple of years grow was like watching a snail. I have a smaller amount in ISAs that advances at a better pace. Secondary to that was the oqaque/inflexible nature.

I think I emphasised the second aspect because it's objective. For some, the performance achieved would be fine.

Perhaps subconsciously I didn't want to substantiate why I felt the performance was poor and how I could do better. It's all subjective/crystal ball stuff.

Good reasons to leave the WP would be improving the outcome for the same costs, or being able to achieve the same outcome for less money.

It's definitely about improving the outcome. If the entire WP holding was guaranteed to rise at some higher percentage a year I'd have let them be.

dunstonh

Watching the transfer value grow over the last couple of years grow was like watching a snail.

If you look at the tracker funds from late 2007 you would have lost around 40% before slowly recovering it in the years that followed. If you plot the WP fund through the same period, it would not have had that level of volatility and the end result may not have been that dissimilar.

If you think your investment strategy is going to be better and you are willing to put the work in to keep the assets rebalanced and the research up-to-date depending on where we are in the economic cycle then that is fine. on the other hand, if your allocations are random then baring getting lucky, you will likely end up with less on a comparable risk basis.

puk999

dunstonh wrote: »

That is a pretty big jump up the risk scale. Whilst I am not a particular fan of with profits, it does have some protections in place, the asset mix is more towards cautious to medium risk and one of your funds had a guaranteed minimum growth rate.

Being in control means knowing what you are doing and why and the consequences. You have gone from a fund where only the final bonus was at risk of a loss and had a guaranteed growth on part of it into index trackers with 40% or so discrete loss potential and possibly more depending on what these higher risk funds are.

I thought long and hard about the risk aspect of it. I know effectively what I'm doing is taking protected money and exposing (gambling?) it on the stock market. My feeling at the moment is there is a lot of potential for growth there. I don't want to look back in x years time having not realised that potential.

I've had stocks and shares ISAs for the last 10 years or so. They've done extremely well and more than bounced back from 2008 so I'm a fan of the stock market. Once the pot I've transferred has grown, and when I feel the market has been on the up long enough, I plan to move a lot into safer assets/cash to lessen any potential downturn as we know it moves in cycles. Even if I get the timing of this horribly wrong, my experience from 2008 tells me that things should bounce back. I think I have a good handle on the risks involved and understand the pot has the potential to drop drastically and theoretically reach £0.

I went with the Fidelity SIPP. I worked for them for a couple of years around 2002 as a software developer which is why I use them for my ISAs. I really like their online tools. The fund finder/evaluator, how easy it is to access the information about each holding (summary, performance, charges). Standard Life's site/tools I find outdated and clunky. I was trying to read FSI there yesterday and some links gave me 404s, some took me to pages which didn't seem to have anything to do with the fund I was seeking information for.

dunstonh wrote: »

You have no more control over the investments than you had on the existing contract. Both see the investments managed by either a manager or computer. Not you.

The SIPP gives me access to around 2,000 funds and a cash account. No initial/switching charges. I didn't check if I could do this with the existing SL contract. I think there are far fewer funds available and I'm not sure you can switch in and out of cash?

dunstonh wrote: »

Your control is only down to the funds you select. Vanguard manage Std Life index trackers. So, if that is your fancy

Trackers aren't really my fancy. I had to transfer into something, so trackers for me were the default until I get time to analyse deeper. Step 1 was getting away from the WP funds I felt were stagnant. Step 2 is an ongoing process of investigation/evaluation.

dunstonh wrote: »

One option could have been to remain with Std Life. Keep the guaranteed growth WP fund and fund switch the other into alternative funds. Therefore giving you the benefit of having the cautious side of the portfolio covered by the WP fund allowing you to adjust risk and volatility with the other unit linked funds you could have selected.

I think this is great advice and considered it. Having a cautious portion is something I will miss (though hopefully it won't keep me awake at night) and want to get back to in a few years.

Main reason for losing the cautious side is I feel I'll be financially better off and still have enough years away from retirement that I don't need to be that cautious. Two more minor reasons were

a) If your SIPP holdings in Fidelity are more than £50k, then the charges fall by 0.1%.
b) Fidelity will add 1% to your pot on monies transferred in from other providers.

dunstonh wrote: »

The SIPP may end up more expensive as well. If it is not a company that is priced for the 2014/2016 changes then you could find yourself paying more when they move to that compliance.

This is not something I'm aware of. Are you referring to auto-enrollment, or something else?

dunstonh

I went with the Fidelity SIPP. I worked for them for a couple of years around 2002 as a software developer which is why I use them for my ISAs. I really like their online tools. The fund finder/evaluator, how easy it is to access the information about each holding (summary, performance, charges). Standard Life's site/tools I find outdated and clunky. I was trying to read FSI there yesterday and some links gave me 404s, some took me to pages which didn't seem to have anything to do with the fund I was seeking information for.

The Fidelity SIPP is expensive.
0.25% platform charge
0.30% additional platform charge based on value.

So, before fund charges, you have 0.55%. You would expect the platform charge to be around 0.3%to 0.4% in total.

It will have better tools than a conventional legacy personal pension. However, are the tools worth the extra cost. I am not against paying more if you use the things you are paying for. However, could you end up paying more for things you dont use beyond initially setting it up.

The SIPP gives me access to around 2,000 funds and a cash account. No initial/switching charges. I didn't check if I could do this with the existing SL contract. I think there are far fewer funds available and I'm not sure you can switch in and out of cash?

There will be fewer funds with SL. However, there will be a range, including trackers and usually a deposit fund.

a) If your SIPP holdings in Fidelity are more than £50k, then the charges fall by 0.1%.
b) Fidelity will add 1% to your pot on monies transferred in from other providers.

a) - Fidelity dont have many good funds at the moment. So, you are not likely to have many or even any in Fidelity funds
b) - short term gain paid for by higher annual charges.

This is not something I'm aware of. Are you referring to auto-enrollment, or something else?

Platforms have to remove commission on their pricing by 2014 for new business and 2016 for legacy business. Some platforms have moved to compliance with those rules. Others have not. A very quick look at the Fidelity SIPP indicates it has moved to that pricing (the old Fidelity SIPP had not and was ironically a Standard Life pension branded as fidelity)

I am not at all against what you are doing. If you put in the effort and continue to do so then the chances of it being better over the long term are pretty good. However, I have seen many over the years dabble for a year and then get bored with it and let it stagnate. Or invest way above their risk profile and sing out how much better they are then their old pension until it then drops big time when they change their tune to "I will never invest on the stockmarket again". Not realising it had little to do with the stockmarket but more to do with them not knowing what they are doing. Sometimes, slow steady and reliable is better than zig zagging all over the place.

puk999

dunstonh wrote: »

The Fidelity SIPP is expensive.
0.25% platform charge
0.30% additional platform charge based on value.

So, before fund charges, you have 0.55%. You would expect the platform charge to be around 0.3%to 0.4% in total.

I admit to not researching the SIPP providers. I just compared Fidelity with Standard Life. Fidelity's platform/service charge seemed to be 0.25% + 0.30% (if you have £30k or more). Standard Life's equivalent SIPP is what they call Level 2 and if you're under £100k then the corresponding charge AFAICT was 0.60%. I figured I'd be getting nicer/easier access to information/tools and pay smaller charges. I hope I didn't compare these two providers incorrectly.

dunstonh wrote: »

It will have better tools than a conventional legacy personal pension. However, are the tools worth the extra cost. I am not against paying more if you use the things you are paying for. However, could you end up paying more for things you dont use beyond initially setting it up.

Good point. I will consider this going forward. If I don't end up using the tools I'm paying for, I'll reconsider. One could say I should've researched all providers before switching. There's a number of reasons I didn't do that. I'm not saying all the reasons are bona fide and accept some may be emotional!

a) I work full-time my spare time is taken up learning something which soaks up a lot of time and zaps the brain.
b) I'm familiar with Fidelity and want a single logon and see me ISAs alongside my pension.
c) A few years ago I had £1,000 doing nothing so I bought some shares. I went for the very cheapest share dealing service that didn't have an annual charge. Hoodless Brennan I think it was. Then they got bought out. My shareholding had dropped quite a bit at this point, but I bought them for the longer term. They gave me the choice of selling the shares and closing the account, or moving to new provider who imposed charges on all accounts. I felt forced to sell at a loss. This experience made me a bit wary of seeking the lowest provider for my pension funds. Saying that though, I had just figured Fidelity would be very competitive. I didn't realise until now they're considered expensive.
d) Fidelity's carrot of 1% if you switch before 31st December 2013.

dunstonh wrote: »

a) - Fidelity dont have many good funds at the moment. So, you are not likely to have many or even any in Fidelity funds

My mistake. I said "If your SIPP holdings in Fidelity are more than £50k, then the charges fall by 0.1%." when I meant to say "If your Fidelity SIPP account value is worth..."

dunstonh wrote: »

Platforms have to remove commission on their pricing by 2014 for new business and 2016 for legacy business. Some platforms have moved to compliance with those rules. Others have not. A very quick look at the Fidelity SIPP indicates it has moved to that pricing (the old Fidelity SIPP had not and was ironically a Standard Life pension branded as fidelity)

Thanks for explanation. I did see reference to Standard Life pensions on some fund factsheets from Fidelity and wonder what that was about.

kidmugsy

A 4%p.a. guarantee with an equity-like upside, and you sold it. That, as Sir Humphrey would have said, was courageous.