Cannot make decision on pension

Susy909

I have a pot of £70,000 that I want to get in 30 years.

The options I've decided on are:

1. Prufund growth fund. This seems a very good with profits fund but has a charge of 1.1%.

2. Sipp. Go with a sipp and put it in some general funds like Vanguard LS60, Vanguard 2050, L&G multi index etc, total 0.6%. On all chart tools, the Prufund seems to beat them so thinking it might be worth the extra 0.5% charge.

ermine

Susy909 wrote: »

On all chart tools, the Prufund seems to beat them so thinking it might be worth the extra 0.5% charge.

Whose chart, whose tools, whose platform? Cui bono and all that.

With profits is basically taking a company say-so on returns. I had an endowment that did that once, which was a with-profits fund. Thankfully they sold a single man with no dependants life insurance so I pressed a mis-selling claim successfully on that.

The salesforce is incentivised to promise you the moon, because in 30 years time they won't be there to carry the can. See how with profits worked out in the past

Although charges matter, the problem with a with profits fund is not the charges. It is the fact that the product lacks all transparency, there is nothing you can benchmark it on, and a lot of the return may be in the terminal bonus, about which you will find out in 30 years. At least with the other options you can track across the years how you are doing relative to where you expected to be and adjust course as required.

A WP policy isn't necessarily bad, but the trouble is you don't get to find out before it's too late. Avoid, IMO

Mutton_Geoff

Why SIPP if you already have the (tax paid) cash? Drip feed it into an ISA over the next 4 years, £20k a year, the balance in 3-2-1 year high interest cash accounts. Then, whatever your circumstances in the future, you can get the money out without waiting until 55. Unless you have a tax efficient way of putting it into a SIPP?


As for investments for 30 years, plenty of choices and suggestions here, but annual costs (for the investment and the platform) are key over such a long period.

Linton

The Prufund does what it is supposed to do, grow fairly steadily but unspectacularly year after year, good times and bad. A very sensible cautious option in my view. Some WP funds have been poor value but the Prufund is one of the best. Remember that published returns are after charges so when it has out performed other possibly less cautious funds it has more than paid its way. I have held a Pru WP investment bond (not the growth fund) since 2002 which has averaged 5.5% annual return. During the 2008/2009 crash there was only the slightest blip downwards. The majority of the gain is in the guaranteed annual bonus.

Given you still have 30 years to go both the Prufund and VLS60 etal seem very cautious.

jamesd

Susy909 wrote: »

1. Prufund growth fund. This seems a very good with profits fund but has a charge of 1.1%.

That probably isn't the real full cost. In addition their document WPGB0031.PDF discloses that their shareholders "are entitled to one ninth of any increase in the value" and this is deducted from the plan value via charges.

Linton wrote: »

The Prufund ... grow fairly steadily but unspectacularly year after year, good times and bad.

No, it doesn't. What they do is hide some of the performance, lying to you throughout about the real value, which they call the "unsmoothed price" and never disclose. Meanwhile, every daily value is the faked "smoothed price", based on an assumed growth rate, not how the fund has really performed. Except they can at their discretion choose to use the real value instead, which they say they may do if there are unusually large buys or sells.

If you look at the factsheet you'll find nine "Unit Price adjustments" where they suddenly moved the unit price up or down by a few percent in a lump since the start of 2009. Sell just before an up adjustment? That's real value you just didn't get but which the investments already had made. In between there's the straight line performance characteristic of faked values. The way they conceal the underlying real value of the investments is described in another document. As they explain there, they just pick a growth rate every quarter and apply it every day regardless of the real performance, then let some of the underlying performance slip through via the unit price adjustments:

"Every day, the smoothing process checks the gap between the smoothed price (published) and the unsmoothed price (not published). For this purpose, the gap is calculated using both the unsmoothed price and a 5 day rolling average of the unsmoothed price. It at any time the gap is 10% or more the smoothed price will be adjusted immediately to reduce the gap to 2.5% ... In addition, on each quarter date if there is a gap of 5% or more when the smoothed price is compared to the unsmoothed price for that day, the smoothed price is adjusted to reduce the gap by half"

So for example, in mid 2009 there was one day where if you sold you'd have missed out on the 8.15% increase in the price of the units the next day, when part of the gain was included in the price by an adjustment. If they hadn't been hiding it you'd have got most of that gain instead of losing it. Earlier in 2009 there was a day where they cut the price by 2.55%, so you'd have suffered that loss in one day if you'd bought the day before, even though it had already happened to the real investments at the time you bought.

In addition the with profit fund holds what is called the "inherited estate" which is past profits that just aren't ever disclosed but are used for working capital instead of being passed to the investors as part of the performance of their investments. Whatever amount they choose to put into the inherited estate is just lost money that you'll never get but which from time to time insurance firms have sought to have paid to their shareholders instead of their investors.

It does do what it's supposed to do, though: hide the real values from you so that the ups and downs are less likely to unsettle people because they never learn about their full extent.

Better to use something that isn't built on the basis of systematic lying about real investment performance and values. A mixed asset fund like the Vanguard LifeStrategy range or many others also smooths ups and downs quite a bit but doesn't involve any routine lying about the performance of the investment.

However, there is one time this fund could be quite interesting: if you are very worried about a stock market drop. They say that between the time you buy and the next of their investing quarter starts you get the faked growth rate, without adjustments, and don't hold any of the real underlying investments. So you could buy well before the next quarter start and sell before the quarter starts if the market has gone down. Assuming it works as described, which isn't necessarily true in such a situation.

ermine

@jamesd That is a top with-profits deconstruction

As a real-world example, I was stupid enough to buy a Friends Provident WP endowment policy to back the capital on a mortgage in 1989. There were many things wrong with the decision to buy a house then, but using an endowment policy was gratuitous dimwittiness added to the rank stupidity of buying at a market high.

When I finally got shot of it by pressing a mis-selling claim, the settlement to put me in the position I would have been using a repayment mortgage represented nearly half of the mortgage capital - the with-profits fund was nearly 50% short in just over ten years.

I know an anecdote isn't data, but the trouble with WP funds is that the lack of transparency means you can drift a long way off track without knowing. All they did in my case was assert that the terminal bonus (paid at the end of the policy) would make up for the falling interim bonuses, until the FSCS stepped in and forced them to 'fess up.

With an index fund you can value it daily. As such you can benchmark it, say every year, and see if you a drifting off track. The values of stock market investments are volatile. Paying a with-profits fund good money to hide this from you means they can hide poor performance from you too.

30 years is a long time to invest. If your concern is about a market fall just before the end of the thirty years, a common approach to that is to shift yourself out of the market in the five preceding years, or alternatively to shift the equity:bond ratio towards bonds over those years.

Malthusian

The only reason it would make sense to go with the PruFund is if you won't be able to bear seeing the fund go up and down by in the region of 10% on a daily basis and would panic and cash in, hence you would prefer it to be hidden from you via the With Profits mechanism. But you would be happy with the fact that this "protection" would be removed when it is most needed, as when there is a big market crash Prudential will apply a unit price adjustment to reflect the true value. So it makes sense if you can't tolerate falls in the region of 5-10% but can tolerate falls of 30-40%. In other words never.

In any case your second paragraph doesn't contain any suggestion that you wouldn't be able to cope with falls in value.

Picking With Profits on the grounds of performance makes no sense. The fund is virtually certain to underperform a comparable unit-linked investment, because a) growth in good years has to be held back to allow the unit price to be increased in bad years b) as Jamesd says, some of the growth is used to benefit shareholders rather than policyholders (whereas with a directly unit-linked investment, all of the growth minus fund expenses benefits policyholders).

The PruFund will underperform a directly unit-linked investment in good times, and in most bad times as well (because the good times won't compensate as much for the bad times, due to the growth that was siphoned off by shareholders). The only time the PruFund might outperform a unit-linked investment is in a slightly bad time when the unit linked fund has fallen slightly but the PruFund is still using the fake price and hasn't yet switched to the real price.

But in any properly diversified investment there are more good times than bad times and far far more good times than slightly bad times, and over a 30 year timescale to someone who can tolerate investment risk, the bad times are of virtually zero relevance.

If it's past performance you're looking at then I can find you 100 unit-linked funds that have outperformed PruFund over whichever timescale it is. Of course, it's not guaranteed or even likely that they'll necessarily outperform PruFund in the future. The same is true of PruFund.

dunstonh

The two options being considered do not seem logical comparisons. One is for people who want an element of capital security and low volatility. The other is for a medium risk investor happy to see the money fluctuate in line with markets the underlying assets are in.

This suggests that the OP has not yet nailed down what their position on investment risk is yet.

Susy909

On a scale of 10 with 10 being the most risky. I am a 5.

I think I'm going to put £40k in the prufund and the rest in a sipp with a mix of low charge funds like the LS60, Consensus 85 etc. The reason for the prufund is not security but the performance, it seems exceptional.

dunstonh

If you have decided where you fit on the risk scale, its usually best to invest within your risk tolerance. Not invest in funds above it. one of the funds you have listed is a couple of notches higher up that scale.

Alexland

Yes I was surprised at the mention of VLS60 alongside Consensus 85 they are quite different. I wouldn't expect someone interested in either of those funds to also be considering a with profits investment.

Even if Prufund has done well what is to say that their performance will continue (their approach may not work if the economy changes in certain ways, etc) and on a with profits fund you wouldn't be able to monitor performance or exit effectively.

I don't understand a customer that is so risk averse they need to be shielded from volatility (the truth) but is happy to be totally disappointed at the end.

I think a fundamental assesment of the OPs attitude to each core asset class and the resulting characteristics is needed before selecting any funds.