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Pension fund charges

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A previous thread of mine sparked some comments about fund charges.  I wondered if I could have some views on the charges I'm paying for various funds and some opinions on where I might look to reduce those charges.  As a summary, alongside active LGPS and linked AVC schemes, my wife and I hold the following personal pension pots.  Now that we're in the LGPS and Prudential AVC schemes, we won't be adding to any of these, so they are effectively frozen.  I understand people can't give specific advice, so I'm after some general pointers as to whether these charges represent reasonable value and if not, where I might reduce them.

Scottish Widows - £105k, charge of 0.75%  (former employer scheme)
Aviva - £106k, charge of 1.35% (0.35% platform, 1.00% fund)  (former employer scheme)
Clerical Medical - £56k, charge of 1.00%
Sun Life - £6k - charge of 1.30-1.60% 

I've started to read into SIPPs.  I don't consider myself competent enough to manage my own portfolio, so I'm happy to pay companies to host my funds and therefore a SIPP may not be the right route.  We have at least eight years before we can touch these but don't intend to touch them for another 13 years, so any savings in charges can mount up.
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  • AlbermarleAlbermarle Forumite
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    I've started to read into SIPPs.  I don't consider myself competent enough to manage my own portfolio, so I'm happy to pay companies to host my funds and therefore a SIPP may not be the right route.

    The pensions you mention also involve investment selection, directly or indirectly. Normally they will have a choice of funds , if you do not pick one then it goes in the default fund. However this might well not be the best for you .

    SIPP's also offer customer friendly one stop options for inexperienced investors ( expensive though)

    Neither will offer you any direct advice or select funds for you personally. You need to pay an IFA if you want that .

  • 8370562883705628 Forumite
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    It’s a long one but hopefully useful.

    Is your LGPS pension defined benefit or defined contribution? I’ve written this answer as if it's DC but if don't worry if it's DC my answer is still valid...probably

     Anyway on with my 2p on the subject.

    SW charges are high but not ridiculously so
    Aviva total rip-off
    Clerical rip-off
    Sun Life are mugging you, in broad daylight, outside a police station

    If you really don't feel confident managing your own portfolio, then your options are:

    a) Accept that you just don't know enough about it, better with the devil you know, or –

    b) You *could* get what you’re getting now for less, i.e. make more

    Your current funds will probably have some sort of lifestyling or glide path built in. I.e. they gradually switch into lower risk investments as you get closer to retirement age. You could transfer the lot into a SIPP (I suggest Vanguard as the platform, others in the forum may suggest others, just go with something cheap with a website you find easy to navigate and understand) and pick a Vanguard Target Retirement Fund which will do the same thing you're currently paying ~1.05% for on average across the whole £273k, for a *total* cost of 0.45%. That includes Vanguard’s 0.15% platform which is capped at £250k assets, or £375pa (also for … reasons I worked out in Excel because this is what I do to relax… it’s very slightly more profitable for you if tell Vanguard to take the platform fee by direct debit out of your bank account rather than pay it within the SIPP)

    I would expect the returns between a Vanguard fund, and your current lot, to be quite similar. Say your current funds return 5% over the rest of your life, that fee is effectively a 21% tax on your returns. That 0.6% difference, every year, is *very* roughly 6% extra a decade that you could keep. 0.6% might not sound like much but it’s £1.64k on £273k and that only grows as the pension grows. Between now and 2033 it *could* add up to an extra £30-£40k. If that isn’t worth a bit of admin work I don’t know what is. That could buy a world cruise.

    This may not be the absolute bare bones cheapest option in the market, but it's easy to manage. One fund, one platform, same company for both, all the investment decisions and asset allocation and rebalancing taken care of for you. Someone else may have a suggestion that totals 0.3%, maybe even 0.2%.


    As for which Target Retirement fund to pick, well you're planning on retiring in 13 years so the Target Retirement 2035 fund would be fine.

    These funds start at 80% stocks 20% bonds, and start coming down to 50:50 from 25 years before target date (i.e. the 2035 started doing this in 2010... except it didn't exist then but anyway), and then come down to 30% stocks 70% bonds 4 years later, i.e. 2042. This is fine, but it's based on the assumption that it's your entire wealth. Ignoring the current market for a moment, in general you would expect a fund like that to return not much more than inflation after charges, maybe 1%, and you might need this to last you for life. It doesn't take into account the state pension, the NHS (these glide paths are often made up in America where they need more safer assets to pay for the healthcare), and your defined benefit pensions. You can plan around these known, guaranteed cash flows and if you leave it invested in the 2035 fund, you could risk having it invested too cautiously and perhaps running out, not having enough income, or having to scale back your retirement.

    I'm assuming the older of you is 47 based on the info you gave, so your life expectancies take you out to ~2060. You want the fund to be in that super-safe lower asset allocation by then so you could go with the 2050 fund. It's 80% equity 20% bonds now, it'll be 72% equity 28% bonds when you retire in 2033 which is fine (Jack Bogle suggested for American investors, starting retirement on 60:40 to 65:35 is fine, but the vast majority of Americans don't have defined benefit pensions so it's fine if you're a tad more weighted towards stocks because you do have that guaranteed income so you don't need to invest as cautiously), 65:35 when you can start claiming your state pension in 2040, 50:50 in 2050 and by the time you need it for care or an inheritance, it'll be down to 30:70 and not very volatile at all.

     

    There’s quite a difference in the 2035 and 2050 funds, but not enough of a difference to worry about between say, the 2035 fund and the 2040 fund, or between the 2050 fund and the 2045 fund.

    -or- 

    c) Or you can pay an IFA to tell you what I just told you

     

    Happy to take any questions :)

  • Aylesbury_DuckAylesbury_Duck Forumite
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    Thanks very much. I will digest properly and come back with any questions. 
  • LHW99LHW99 Forumite
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    IMO its worth transferring at least the Aviva and Sunlife into either a SIPP, or a personal pension if you want something basic. It would reduce the number of different schemes and should reduce charges on almost half of the total.
    Alternatively can anything be transferred into your LGPS schemes, or is it past the cut off for that?
  • JonathanBFSJonathanBFS Forumite
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    10 Posts Second Anniversary

    It’s a long one but hopefully useful.

    Is your LGPS pension defined benefit or defined contribution? I’ve written this answer as if it's DC but if don't worry if it's DC my answer is still valid...probably

     Anyway on with my 2p on the subject.

    SW charges are high but not ridiculously so
    Aviva total rip-off
    Clerical rip-off
    Sun Life are mugging you, in broad daylight, outside a police station

    If you really don't feel confident managing your own portfolio, then your options are:

    a) Accept that you just don't know enough about it, better with the devil you know, or –

    b) You *could* get what you’re getting now for less, i.e. make more

    Your current funds will probably have some sort of lifestyling or glide path built in. I.e. they gradually switch into lower risk investments as you get closer to retirement age. You could transfer the lot into a SIPP (I suggest Vanguard as the platform, others in the forum may suggest others, just go with something cheap with a website you find easy to navigate and understand) and pick a Vanguard Target Retirement Fund which will do the same thing you're currently paying ~1.05% for on average across the whole £273k, for a *total* cost of 0.45%. That includes Vanguard’s 0.15% platform which is capped at £250k assets, or £375pa (also for … reasons I worked out in Excel because this is what I do to relax… it’s very slightly more profitable for you if tell Vanguard to take the platform fee by direct debit out of your bank account rather than pay it within the SIPP)

    I would expect the returns between a Vanguard fund, and your current lot, to be quite similar. Say your current funds return 5% over the rest of your life, that fee is effectively a 21% tax on your returns. That 0.6% difference, every year, is *very* roughly 6% extra a decade that you could keep. 0.6% might not sound like much but it’s £1.64k on £273k and that only grows as the pension grows. Between now and 2033 it *could* add up to an extra £30-£40k. If that isn’t worth a bit of admin work I don’t know what is. That could buy a world cruise.

    This may not be the absolute bare bones cheapest option in the market, but it's easy to manage. One fund, one platform, same company for both, all the investment decisions and asset allocation and rebalancing taken care of for you. Someone else may have a suggestion that totals 0.3%, maybe even 0.2%.


    As for which Target Retirement fund to pick, well you're planning on retiring in 13 years so the Target Retirement 2035 fund would be fine.

    These funds start at 80% stocks 20% bonds, and start coming down to 50:50 from 25 years before target date (i.e. the 2035 started doing this in 2010... except it didn't exist then but anyway), and then come down to 30% stocks 70% bonds 4 years later, i.e. 2042. This is fine, but it's based on the assumption that it's your entire wealth. Ignoring the current market for a moment, in general you would expect a fund like that to return not much more than inflation after charges, maybe 1%, and you might need this to last you for life. It doesn't take into account the state pension, the NHS (these glide paths are often made up in America where they need more safer assets to pay for the healthcare), and your defined benefit pensions. You can plan around these known, guaranteed cash flows and if you leave it invested in the 2035 fund, you could risk having it invested too cautiously and perhaps running out, not having enough income, or having to scale back your retirement.

    I'm assuming the older of you is 47 based on the info you gave, so your life expectancies take you out to ~2060. You want the fund to be in that super-safe lower asset allocation by then so you could go with the 2050 fund. It's 80% equity 20% bonds now, it'll be 72% equity 28% bonds when you retire in 2033 which is fine (Jack Bogle suggested for American investors, starting retirement on 60:40 to 65:35 is fine, but the vast majority of Americans don't have defined benefit pensions so it's fine if you're a tad more weighted towards stocks because you do have that guaranteed income so you don't need to invest as cautiously), 65:35 when you can start claiming your state pension in 2040, 50:50 in 2050 and by the time you need it for care or an inheritance, it'll be down to 30:70 and not very volatile at all.

     

    There’s quite a difference in the 2035 and 2050 funds, but not enough of a difference to worry about between say, the 2035 fund and the 2040 fund, or between the 2050 fund and the 2045 fund.

    -or- 

    c) Or you can pay an IFA to tell you what I just told you

     

    Happy to take any questions :)

    Please don’t listen to this nonsense...
    consult an IFA to give regulated advice. 
  • MordkoMordko Forumite
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    1. Anything over 0.5% (platform plus fund costs) is too high in my book. I am around 0.1%. 10 years ago things were different. And remember, returns are unknown. Costs are an important component of your returns that you can control. 
    2. Read an learn. Don’t just read the forum where its hard to tell who is clueless. You can search for recommended books here. A few days of reading will be the best investment you can make.
    3. To me, IFAs are for special situations and yours isn’t. Whether you use one or not, you still need to educate yourself first. IFAs advise. The decision is yours. You need to understand enough to make an informed one. 
  • edited 10 July at 11:23PM
    dunstonhdunstonh Forumite
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    edited 10 July at 11:23PM
    Be wary, some of the providers listed have plans which offered multi-charge plans which have higher allocation or bonus units.   Old plans can be a bit smoke and mirrors and cannot be measured by AMC alone.    Some of the providers had fund based discounts which means you wont be on the default charge.  They also had different versions at different prices depending on the distribution method.   So, some of those charges could be the maximum default and not the real charge.    Indeed, it is clear that some of the investments held on one of them are not internal funds but externally managed funds.  So, not necessarily expensive.
    You should ensure the charges are exactly what you have written here before making a decision to transfer.
    Some of the providers listed also offered GARs and other guarantees on some of their plans. 
    So, I cannot agree with the earlier post telling you to transfer as there is not enough info.

     it’s very slightly more profitable for you if tell Vanguard to take the platform fee by direct debit out of your bank account rather than pay it within the SIPP)
    No its not.  Its better to pay it out of the SIPP as the money in the SIPP has had tax relief.   And charges paid within the pension are not subject to tax.


    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.
  • jamesdjamesd Forumite
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    This is a placeholder for the third post...
  • 8370562883705628 Forumite
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    dunstonh said:
    Be wary, some of the providers listed have plans which offered multi-charge plans which have higher allocation or bonus units.   Old plans can be a bit smoke and mirrors and cannot be measured by AMC alone.    Some of the providers had fund based discounts which means you wont be on the default charge.  They also had different versions at different prices depending on the distribution method.   So, some of those charges could be the maximum default and not the real charge.    Indeed, it is clear that some of the investments held on one of them are not internal funds but externally managed funds.  So, not necessarily expensive.
    You should ensure the charges are exactly what you have written here before making a decision to transfer.
    Some of the providers listed also offered GARs and other guarantees on some of their plans. 
    So, I cannot agree with the earlier post telling you to transfer as there is not enough info.

     it’s very slightly more profitable for you if tell Vanguard to take the platform fee by direct debit out of your bank account rather than pay it within the SIPP)
    No its not.  Its better to pay it out of the SIPP as the money in the SIPP has had tax relief.   And charges paid within the pension are not subject to tax.


    Sorry yes it's for ISAs that that's is true, my mistake.
    And yes there wasn't really enough information about the questioner's whole situation to come up with something worthwhile.
  • 8370562883705628 Forumite
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    Please don’t listen to this nonsense...
    consult an IFA to give regulated advice. 
    You must be a struggling IFA.
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