Should I switch my pension?

georgemason

Hi all, does anyone mind offering some pensions advice?

I have been in a pension scheme since I started working for my company (4 years or so). They pay in 10% to a personal pension scheme which was set up by some advisor which handles all of the employee's (around 10 or so) pensions. The pension is invested into a Royal London pension fund, which is split into two funds (one global equities, and one bonds) and distributed according to my previously stated risk preference (90/10).

Only recently have I actually started looking into the fees and charges... The annual management fee of the fund is 1.4% (1% for fund, 0.5% advisor cut, and 0.1% discount). This strikes me as incredibly high.

Am I not better off opening my own SIPP (Best Invest have a 0.3% platform charge for example) then juggle some low cost index funds (like 0.25% per year). I'm no expert obviously, but I feel like I know enough to build a portfolio of the same diversification and risk profile of my current plan at least. Plus I like the idea of managing it myself and adjusting the risk distribution over time according to my own personal wants/feelings. This would save me 0.85% per year which would add up to tens of thousands of pounds by retirement age.

It seems like a no brainer, but I was wondering if I am missing anything? This 'advisor' (which hasn't really offered any meaningful advice) is just chucking my pension into two funds (some Royal London equities fund, and a Royal London bond fund) and has simply distributed them according to my risk preference (90/10 as I am quite young and don't have much money in there yet anyway). I don't see where his value is being added, and I don't know why Royal London charge 1% per year when you can get a vanguard fund which performs just as well for a quarter of the price...

Should I discuss this with the advisor? Hes out to lose money, so not sure how useful his advice will be.

:money:

bowlhead99

a) while lots of people bang on about vanguard it is far from certain that they will give the exact same performance over time as the RL funds.

There is certainly no harm in asking the advisor why he uses an equities fund that isn't a simple index. He has probably heard the question before.

b) One would assume the advisor is not a whole of market unrestricted IFA providing a tailored solution to every individual. Your company bought him in to help provide a pension solution to a whole range of employees. Leaving a scheme that pays you 10% of your salary would seem like financial suicide unless the company is happy to make contributions to a different personal pension scheme for every employee which most employers will not do.

dunstonh

Only recently have I actually started looking into the fees and charges... The annual management fee of the fund is 1.4% (1% for fund, 0.5% advisor cut, and 0.1% discount). This strikes me as incredibly high.

its not incredibly high.
If this is an ex Scottish Life contract, then there is probably a fund based discount applied to it as well. Have you checked for those?
You mention it is an employer scheme. There is a cap coming on default options to 0.75%.

Am I not better off opening my own SIPP (Best Invest have a 0.3% platform charge for example) then juggle some low cost index funds (like 0.25% per year).

Not if you lose the employer contribution of 10%.

I don't see where his value is being added, and I don't know why Royal London charge 1% per year when you can get a vanguard fund which performs just as well for a quarter of the price...

The adviser is acting as an administrator for the employer.
The vanguard fund is not a quarter of the price as you are not comparing like for like. Royal london is packaged pricing (fund and provider/platform charge combined) whereas the vanguard is unbundled and doesnt include provider/platform charge which you need to add on top.

georgemason

bowlhead99 wrote: »

a) while lots of people bang on about vanguard it is far from certain that they will give the exact same performance over time as the RL funds.

There is certainly no harm in asking the advisor why he uses an equities fund that isn't a simple index. He has probably heard the question before.

b) One would assume the advisor is not a whole of market unrestricted IFA providing a tailored solution to every individual. Your company bought him in to help provide a pension solution to a whole range of employees. Leaving a scheme that pays you 10% of your salary would seem like financial suicide unless the company is happy to make contributions to a different personal pension scheme for every employee which most employers will not do.

Thanks for your reply. I might contact my FA then, and ask him some questions.

I am sure my employer would be open to paying the money into my own SIPP, so I think its best to assume that my employer contribution would continue regardless.

bowlhead99

Just from the company point of view, why they would run this "expensive" scheme...

As the employer running a small business, making contributions to a whole load of separate personal pension / SIPP schemes and dealing with the admin and cash payments of that, instead of getting an advisor or benefits solutions firm to help with a simple group personal pension which covers the auto-enrolment responsibilities, would be a pain.

Plus you would get naive young employees going for the "take the cash into your own self-managed pot" option of having money to spend on whatever they liked in a SIPP, maybe even adding to it with pension from previous employers, and later complaining that as the employer it was your duty to have protected them from making terribly stupid and inappropriate choices within such an open ended and complex investment vehicle with 10000 options.

And if as a company you are looking to buy advice on a pension scheme for the benefit of all your staff, but 30% of them demand to be given their money for their own personal scheme, then the adviser and the pension in general may cost more for everyone else due to lost economies of scale.

Effectively if you buy a DIY platform with 0.3% platform fee, and a managed fund with a typical fee of 0.5-0.8% a year, you're looking at 0.8-1%+, maybe half a percent lower than the company solution which costs more and encompasses advice. So the only saving is the half a percent advice charge and then maybe some extra savings if you go for a cheap index, which a lot of people wouldn't. For you with a penchant for indexes, you can find a cheaper solution than the scheme the company has set up, if cost is your goal, but many wouldn't. So allowing or encouraging people to find their own solution rather than use a company sanctioned one, is really not on the cards for most employers, even if they are ambitious young start-ups with an entrepreneurial spirit.

Lowering your overall fee exposure, if it can be done without affecting your returns, is a sensible thing for you to try to do. From your CFO's point of view, there is a cost of time and effort in running a separate contributions plan for you getting special treatment outside the standard company scheme, and the money you're talking about saving for yourself is half a percent of ten percent of your salary. On a large pot over time, this will add up. In year one, half a percent of ten percent of a £40k salary is twenty pounds. That's why most employers will laugh you out of town if you say you'd like them to pay your benefits into a SIPP rather than join the company scheme in the normal way.

I may be speaking out of turn if you've already agreed with your boss that they'd fund a SIPP. But if they don't, there would be nothing to stop you putting your own contributions (over and above whatever needed to get the company 10%) into your own SIPP?

georgemason

dunstonh wrote: »

its not incredibly high.
If this is an ex Scottish Life contract, then there is probably a fund based discount applied to it as well. Have you checked for those?
You mention it is an employer scheme. There is a cap coming on default options to 0.75%.



Not if you lose the employer contribution of 10%.



The adviser is acting as an administrator for the employer.
The vanguard fund is not a quarter of the price as you are not comparing like for like. Royal london is packaged pricing (fund and provider/platform charge combined) whereas the vanguard is unbundled and doesnt include provider/platform charge which you need to add on top.

Thanks for taking the time to post dunstonh

Okay, assuming I don't lose the employer contribution, a passive index fund on best invest would cost me 0.55% annual, compared to 1.4% now. That's a saving of 0.85% annual. Over the net 30-40 years that's going to add up to a massive amount. Obviously thats assuming the same performance between funds (which isn't guaranteed) but then looking at the performance of the Royal London fund, its not even beating the sector (global equities) on average. In addition (and I might be getting confused a bit here) it doesn't look like the Royal London fund pays out any dividends (how come?) whereas a passive index fund might yield 1.x% per year (which would completely offset the fees two-fold).

Thanks for taking the time to explain these things, its all very new to me and I find it all very interesting!

PS. you are correct, it is an ex-Scottish Life contract, although I do not see any discounts (beyond the 0.1% I mentioned above), the charges are quite clearly presented as 1.4%

dunstonh

In addition (and I might be getting confused a bit here) it doesn't look like the Royal London fund pays out any dividends (how come?) whereas a passive index fund might yield 1.x% per year (which would completely offset the fees two-fold).

Pension funds are accumulation units. Unit trusts and OEICs have accumulation units and income units. However, it works out the same. Historically, there was no point in offering income units in pension funds as pensions were the growth product that got you to retirement.

An index tracker would not pay distributions if you had accumulation units. If you bought the tracker with income units then the unit price would not increase as much. However, the effective return of income units with income and accumulation units is the same.

PS. you are correct, it is an ex-Scottish Life contract, although I do not see any discounts (beyond the 0.1% I mentioned above), the charges are quite clearly presented as 1.4%

It may be worth asking them if there are any fund based discounts as most of the Scot Life ones you see have them. Dont rely on a statement as they may only tell you what you are currently qualifying for. Not what you will qualify for when it gets above £x. Typically, the discounts start around £20k.

Also, have you checked the charges recently as the cap should be at 0.75% on default funds. They have a fund range and some of the charges are higher/lower. So, it may be that changing the funds could result in a reduction in charges.

http://adviser.royallondon.com/articles/updates/2014/november/our-charge-cap-and-commission-stance/

georgemason

bowlhead99 wrote: »

Just from the company point of view, why they would run this "expensive" scheme...

As the employer running a small business, making contributions to a whole load of separate personal pension / SIPP schemes and dealing with the admin and cash payments of that, instead of getting an advisor or benefits solutions firm to help with a simple group personal pension which covers the auto-enrolment responsibilities, would be a pain.

Plus you would get naive young employees going for the "take the cash into your own self-managed pot" option of having money to spend on whatever they liked in a SIPP, maybe even adding to it with pension from previous employers, and later complaining that as the employer it was your duty to have protected them from making terribly stupid and inappropriate choices within such an open ended and complex investment vehicle with 10000 options.

And if as a company you are looking to buy advice on a pension scheme for the benefit of all your staff, but 30% of them demand to be given their money for their own personal scheme, then the adviser and the pension in general may cost more for everyone else due to lost economies of scale.

Effectively if you buy a DIY platform with 0.3% platform fee, and a managed fund with a typical fee of 0.5-0.8% a year, you're looking at 0.8-1%+, maybe half a percent lower than the company solution which costs more and encompasses advice. So the only saving is the half a percent advice charge and then maybe some extra savings if you go for a cheap index, which a lot of people wouldn't. For you with a penchant for indexes, you can find a cheaper solution than the scheme the company has set up, if cost is your goal, but many wouldn't. So allowing or encouraging people to find their own solution rather than use a company sanctioned one, is really not on the cards for most employers, even if they are ambitious young start-ups with an entrepreneurial spirit.

Lowering your overall fee exposure, if it can be done without affecting your returns, is a sensible thing for you to try to do. From your CFO's point of view, there is a cost of time and effort in running a separate contributions plan for you getting special treatment outside the standard company scheme, and the money you're talking about saving for yourself is half a percent of ten percent of your salary. On a large pot over time, this will add up. In year one, half a percent of ten percent of a £40k salary is twenty pounds. That's why most employers will laugh you out of town if you say you'd like them to pay your benefits into a SIPP rather than join the company scheme in the normal way.

I may be speaking out of turn if you've already agreed with your boss that they'd fund a SIPP. But if they don't, there would be nothing to stop you putting your own contributions (over and above whatever needed to get the company 10%) into your own SIPP?

Hi bowlhead, thanks for your contribution

I am not talking about setting up my own entrepreneurial SIPP and start randomly investing in all kinds of index funds. My strategy would be to keep is as simple as possible, and maybe just fund two different vanguard lifestrategy funds and adjust them over time to reflect my desired risk distribution. See here for an example:

see this link (sorry, it wont let me post direct link) - just google "monevator.com/lifestyle-vanguard-lifestrategy-funds"

Your analysis and conclusion you make about the 1.5% fee upon my 10% being small and insignificant is flawed. The 1.5% is applied to the entire fund annually, not just my contributions. Once it reaches 100,000 that's 1500 every year I am losing, not 1.5% of my 10% contribution. One way of looking at the long term effect of fees is simply modelling it in a compound interest calculator. For the sake of sticking with my current simple assumptions, using my own SIPP platform and a cheap index fund could save me 0.85% per year. Applying this to a fixed pot over 40 years (taking contributions out of the equation for a second) would make the fixed pension pot be worth an additional 40.3% (1.0085^40 = 1.403) after 40 years, than it would be in the more expensive scheme. I don't think these fee savings are small and insignificant, I think annual fee savings can be treated in the exact same way as compound interest or inflation. Also given that its one of the only variables we are truly in control of, perhaps this is where I should be concentrating.

From my companies perspective, they're either willing, or they're not. If they not willing to shift over their contribution, then the decision is a very easy one

:money:

georgemason

dunstonh wrote: »

Pension funds are accumulation units. Unit trusts and OEICs have accumulation units and income units. However, it works out the same. Historically, there was no point in offering income units in pension funds as pensions were the growth product that got you to retirement.

An index tracker would not pay distributions if you had accumulation units. If you bought the tracker with income units then the unit price would not increase as much. However, the effective return of income units with income and accumulation units is the same.



It may be worth asking them if there are any fund based discounts as most of the Scot Life ones you see have them. Dont rely on a statement as they may only tell you what you are currently qualifying for. Not what you will qualify for when it gets above £x. Typically, the discounts start around £20k.

Also, have you checked the charges recently as the cap should be at 0.75% on default funds. They have a fund range and some of the charges are higher/lower. So, it may be that changing the funds could result in a reduction in charges.

Yes I have a passive accumulator fund invested in an ISA. I am aware that the dividend returns are essentially re-invested in the fund, but the fund still estimates the annual yield, which this Royal London pension fund doesn't seem to do. This is what's confusing me :S

Thanks for the link. Although it looks like that link is applicable to workplace pensions. I am in a personal pension scheme, just managed by an IFA which my work arranged for me. I do see that they are capping at 0.75% which is good, but does that apply to my personal pension scheme? Even if it does, with the advisor cut (0.5% on top, to make a total of 1.25%) its still much higher than the 0.55% I could potentially get otherwise.

Cheers

George :money:

dunstonh

Yes I have a passive accumulator fund invested in an ISA. I am aware that the dividend returns are essentially re-invested in the fund, but the fund still estimates the annual yield, which this Royal London pension fund doesn't seem to do. This is what's confusing me :S

They dont mention income yield as they dont need to. However, income is reinvested within the fund.

Thanks for the link. Although it looks like that link is applicable to workplace pensions. I am in a personal pension scheme, just managed by an IFA which my work arranged for me. I do see that they are capping at 0.75% which is good, but does that apply to my personal pension scheme? Even if it does, with the advisor cut (0.5% on top, to make a total of 1.25%) its still much higher than the 0.55% I could potentially get otherwise.

If it is a group personal pension, then it will fall under the changes. If it is an individual personal pension, they wont. The adviser charge is also changing (as per that link).