Diminishing returns on a private pension

penners324

Why not transfer your private pension into your works pension? 

LucyTheWestie

penners324 said:

Why not transfer your private pension into your works pension? 

Very good answer!  (the option I will probably go for)
The concept of paying off my mortgage, and using the difference to pay more into my work pension (and making my employer cough up more) is the bit that is causing my head to explode.   Currently waiting to see if there is a limit to my employers contributions before I decide..... the maths is looking good.   The tax... not so good.    The challenge is in the detail.

coyrls

Your plan to increase payments to your company pension after withdrawing the money from your private pension is unlikley to work because you will be subject to the Money Purchase Annual Allowance (MPAA), which will restrict your total pension contributions to £4,000pa.  The MPAA comes into effect once you withdraw anything above the PCLS (25% tax free) from a DC pension. https://www.gov.uk/guidance/work-out-your-allowances-if-youve-flexibly-accessed-your-pension

coyrls

I have noticed when people are comparing pension performance they tend to discount the contributions they have made.  Many posters talking about the recovery of their pensions seem to include their contributions made during the recovery as part of the recovery of their pensions.  You are comparing a pension where you continued to make contributions to one where you are no longer making contributions.  All other things being equal the "performance" of the pension to which you are making contributions will always exceed the one to which you are not making contributions.

LucyTheWestie

coyrls said:

Your plan to increase payments to your company pension after withdrawing the money from your private pension is unlikley to work because you will be subject to the Money Purchase Annual Allowance (MPAA), which will restrict your total pension contributions to £4,000pa.  The MPAA comes into effect once you withdraw anything above the PCLS (25% tax free) from a DC pension. 

Doh!  I knew there would be a catch!!   (well done for bringing that one to my attention)

LucyTheWestie

coyrls said:

I have noticed when people are comparing pension performance they tend to discount the contributions they have made.  Many posters talking about the recovery of their pensions seem to include their contributions made during the recovery as part of the recovery of their pensions.  You are comparing a pension where you continued to make contributions to one where you are no longer making contributions.  All other things being equal the "performance" of the pension to which you are making contributions will always exceed the one to which you are not making contributions.

I agree.  My colleagues seem amazed at how their work pension pots are growing, but forget that they are also paying into the pot.  In my original post, I tried to explain that I had a pension pot that had no new money being paid into it. I then also have my main work pension, where if I make additional payments, my employer would add more to the pot value.   

coyrls

Sure, I was responding to you saying that "my inactive private pension is earning less and less for me" and agreeing that a transfer to your work pension would be a good idea.  The implication was that your private pension was performing worse than your work pension.  I was making the point that you would need to establish if this was indeed the case.  If the funds are available on Morningstar, you could create two "watchlist" portfolios that represent your two pensions and compare their historical performance  without the confounding effect of contributions.

dunstonh

but year on year I my inactive private pension is earning less and less for me.  (Investments may go down, blah, blah, blah)

We need to know why this is as that is certainly not the usual position.

Certainly, the projections would be going down over the years but that is due to synthetic figures being used in the assumptions.   They are artificial and not real.   The value, on the other hand, should be going up.  Although you would get odd years where it would fall.   2019 was postive year but 2018 was a negative year.   2020 YTD had a significant fall but has mostly recovered.

Now I am 55, should I cash in my private pension pot and use it to pay off my mortgage which will be paid off when I am 67? (I just so happens to have the same value.)

In most cases, that is a bad thing to do as your investment returns are almost certainly higher than the interest you are paying on the mortgage.  Plus, you end up paying a lot of unnecessary tax if you do that.  Plus, you rob your retirement years of income.

I was always taught to pay off my debts first, so should I pay off my mortgage with the proceeds from my personal pension pot?

You were taught incorrectly. Or possibly misunderstood.    You should certainly clear short term expensive debts before investing.  However, long term cheap debts that cost less in interest than investment returns is a different matter.

The smart thing to do, is then invest what would have been my mortgage payments into my work pension, maximising my employers contributions. (Sneaky huh?)

Except you wont be able to do that as you will be limited to just £4000 a year due to accessing your pension early.

I already pay the higher tax rate.

So, pension contributions are an asbolute no brainer.

My calculations show that my private pension savings are making less money than my mortgage is costing me, even when I factor in tax and the fees my pension provider will charge me.  (Why does my pension provider charge me for the privilege of investing my money badly?)

Either your calculations are wrong or you are very badly invested.  Your pension provider is not to blame.  You choose the investment funds.  The funds have a remit to follow.  So, for example, if you picked a deposit fund, then it can only invest in money markets/deposits.   Hence returns would be dire.       Even the most basic medium risk bog-standard multi-asset funds from the insurers have been returning over 5% a year on average

In the vast majority of cases where people say their pension is not performing, it is actually the person misreading or misunderstanding the information on the statements.

Prism

LucyTheWestie said:

Prism said:

You should first get access to your private pension online to see what it is invested in. It is your responsibility to select the investments rather than just let decrease in value. If you can't get online access to it then maybe consider transferring to another provider that does. I needed to do this for a few of my older plans. 
There is no way that it should be losing money to be honest. As a comparision my pension has been increasing by over 13% per year in recent times but my mortage is only 1.4%. 

Really? Does this include payments by yourself or employer?  What was the % increase over the last 12 months without including what you or your employer pay into it?    

I don't keep figures for mid months but do for end of them, so June to June not including any contributions is 10%. Not that you have the same results but it would be worth looking into funds that you do have. It could be that you are invested in UK stocks which have struggled over recent times. 

Anyway, you are in control of your private pension if you want to be and that will probably give you a better outcome than paying a huge chunk of tax and then not being allowed to contribute that much going forward.

coyrls

Prism said:

LucyTheWestie said:

Prism said:

You should first get access to your private pension online to see what it is invested in. It is your responsibility to select the investments rather than just let decrease in value. If you can't get online access to it then maybe consider transferring to another provider that does. I needed to do this for a few of my older plans. 
There is no way that it should be losing money to be honest. As a comparision my pension has been increasing by over 13% per year in recent times but my mortage is only 1.4%. 

Really? Does this include payments by yourself or employer?  What was the % increase over the last 12 months without including what you or your employer pay into it?    

June to June not including any contributions is 10%.

I would say that was exceptional and not typical of the last 12 months' performance for most people.