IFA/DIY pension conundrum

Nosmo_King_2

I am due to retire in 5 months (I know I should have done something sooner - head in the sand time!) I have 2 pensions, 1 is a personal pension worth around £220k and the other is with my current employer (DC) and is worth around £120K I realise it's not that big in the scheme of things. However, I shopped around for an IFA that I was happy with and his fee would be 1.3% of the total invested. I realise that isn't an unreasonable fee but to me it is still £4000 taken from my pension pot. I have been looking at companies like Interactive Investor and to me, the offerings look very similar but without the fee. I am wary about making a massive mistake with what I have but wonder if I would necessarily be £4000 worse off if I did it myself. One idea was to maybe use the IFA for the personal pension and thereby reducing the fee and then when my company pension was due , maybe doing that myself? Has any one got any thoughts on this?

El_Torro

Ultimately it’s a personal decision. If you’re confident in doing it yourself then you avoid the IFA fees. If you don’t know much about investing and tactics for drawing down and you want to DIY then I suggest you read up on the subject. It’s not rocket science, but there are pitfalls that if you don’t avoid could cost you a lot more than 1.3%.

Have you consulted various IFAs? Fees can vary a lot so you might find a more competitive price elsewhere.

Albermarle

Do you have a breakdown of the 1.3% - does that include the IFA % , the platform % and the investment cost ?
Usually there is a one off initial cost as well.
The obvious question is how have the pensions been invested until now , without any IFA ?
Why suddenly do you need an IFA now, just because you  are retiring ? 
I am not saying it is a good or bad idea, but just interested in your thinking .

Linton

Nosmo_King_2 said:

I am due to retire in 5 months (I know I should have done something sooner - head in the sand time!) I have 2 pensions, 1 is a personal pension worth around £220k and the other is with my current employer (DC) and is worth around £120K I realise it's not that big in the scheme of things. However, I shopped around for an IFA that I was happy with and his fee would be 1.3% of the total invested. I realise that isn't an unreasonable fee but to me it is still £4000 taken from my pension pot. I have been looking at companies like Interactive Investor and to me, the offerings look very similar but without the fee. I am wary about making a massive mistake with what I have but wonder if I would necessarily be £4000 worse off if I did it myself. One idea was to maybe use the IFA for the personal pension and thereby reducing the fee and then when my company pension was due , maybe doing that myself? Has any one got any thoughts on this?

II and an IFA do very different jobs.  The main role of the IFA is provide advice and align your investments with your circumstances, objectives and ability to take risk.   II are the equivalent of a bank account - how wisely you spend your money is up to you.

Is the 1.3% an ongoing charge or just a one-off initial charge to review your situation, propose how your money should be invested and then implement it?  If its an ongoing charge what does it include?  Is your IFA a large national company or a small local firm?

In my view it would not be sensible to only use the IFA for part of your money.  For the IFA to choose appropriate investments he must know and take into account your full circumstamnces.  If you do not have the skills to choose such investments the danger is that what you do with those you manage will undermine the IFA's work with the ones he manages. Or the IFA may lower the risk level and return on his investments to partially protect you against any mistakes you may make.

To put the charges into perspective consider two not wildly different funds: VLS80 and VLS60.  The difference in average annual return over the past 5 years is 1.7% per year.  On the other hand in the Covid crash VLS60 fell about 17% whilst VLS80 fell 22%.

If you are confident in your abilities to choose and manage your investments then by all means do everything yourself.  Most regular contributors on this forum do so.  If  not you may wish to hand the whole lot over to the IFA or you could pay the  IFA to set up your investments and perhaps run them for a short time whilst you gain the understanding.

barnstar2077

If you merged both pots on to one platform, then once you are set up in a way that you are comfortable with you shouldn't have to do much.  I am not in drawdown, but from what others have said on these forums it can be as simple as having a cash reserve and a few global trackers.  These forums are full of hardcore DIYers, financial advisers. and everything in between, so only you can decide what is right for you.

dunstonh

. I have been looking at companies like Interactive Investor and to me, the offerings look very similar but without the fee. 

Virtually all providers will have no initial fee because they are not providing advice.  The fee to the adviser is paying for the advice.  Not the product.
The IFA selects the platform, the investment strategy, the investments and the method of drawdown to be used.     

 I am wary about making a massive mistake with what I have but wonder if I would necessarily be £4000 worse off if I did it myself.

Plenty of people DIY successfully.  Plenty of people make a right pigs ear of it and make costly mistakes.  Going DIY with investing is a bit like DIY in any other area.
What method of drawdown is most tax efficient for you and fits your needs?   
What investment strategy would you be using (along with what drawdown strategy)?   Would you be looking at total return or yield?  Would you be looking to split your portfolio into phases covering short, medium and long term or operate a cash float for xx number of months income?   Will it be income drawdown or phased income drawdown?

One idea was to maybe use the IFA for the personal pension and thereby reducing the fee and then when my company pension was due , maybe doing that myself? Has any one got any thoughts on this?

You will probably find the fee increases if you do that.   A lot of IFAs operate tiered charging based on value.  Some wont consider smaller values (one near us only does over £250k).    You can do it but would you actually save anything?
A typical IFA charge on that sort of value is 0.50% p.a.. (the rest will be made up of platform and fund charges).  If you DIY, you will still have platform and fund charges.   If you pick some of the platforms own brand investments, you end up paying more than an IFA.    An in the scheme of things, 0.5% is insignificant.  The markets move by more than that in an hour.  Stockmarkets were down 1.82% on Friday.  You are worrying about a figure less than that.    There is also the unknown variable about which investments will do better or worse. The ones picked by the IFA or yours.   The difference would likely be more than the adviser charge.

Bottom line is that if you know what you are doing and you do it well, you can save money.  If you dont then it can cost you more than paying someone to do it for you.

OldMusicGuy

You need to educate yourself before you do anything. Start with this book by John Edwards: DIY Pensions: A Simple Guide to Pensions, SIPPs & Retirement Planning. It's clear from your post you don't know enough yet to decide. 

It took me several years to get to the point where I was confident to DIY invest a larger pension pot than yours, but I am glad I did.

JohnWinder

Those comments make a lot of sense to me. Except in a couple of clear instances I couldn't follow whether the % figures were % or %/year; you'd want to be clear on this. Couple of other points:

If I had to guess I'd say a lot of people would benefit from a financial advisor. It's a pity we've spent decades transitioning from a DB to a DC style pension system without educating the community in retirement savings management, and spawned an industry that one day will be viewed in a better light.

The Americans go on about hourly fees rather than % of assets fees, although the latter are common. Not without merit, but they've a long way to go.

You can be disappointed by plumbers, brain surgeons and I'm sure IFA's. To minimize that, it can help to have some understanding of their work; good luck with brain surgery, but understanding financial planning is not beyond ordinary folk. Then you get into the situation clearly put in this post: 'The paradox of using an advisor is once you know enough to choose a good advisor, you also know enough to manage your own accounts. I would go as far as to say it's risky and irresponsible not to understand good investing principles and yet turn over your savings to someone without understanding what he's doing.' https://www.bogleheads.org/forum/viewtopic.php?t=243740

Not yet mentioned, even if you know how to construct a great plan, an advisor can help you avoid poor, emotionally driven choices at times of market crisis, although some threads recently have sounded like the client should have been doing that to the advisor.

I don't think it's that hard to do it yourself, but if you don't know much then you either simply accept the most plausible bit of advice from an internet forum and need all the luck in the world for it to be suitable for you, or you put in the hard yards to learn enough to properly evaluate the most plausible bit of advice - from whomever.

dunstonh said:

  An in the scheme of things, 0.5% is insignificant.  The markets move by more than that in an hour.  Stockmarkets were down 1.82% on Friday.  You are worrying about a figure less than that. 

The caveat to that is that the 'lost' 1.82% from last Friday will be regained sometime if no one acts recklessly. The, I'll make this plural since it's every year, fees of 0.5%/year on assets won't  come back.

[Deleted User]

Costs have a considerable impact on the return  you can expect.  While daily fluctuations on the stock-markets can be large during high volatility periods, expected real returns are around 2-3% per year for a balanced portfolio (depending on who you ask).  0.5% is a quarter of what you could be making for the next 10 years.  Except that its not the only investment cost. It comes on the top of other costs.  

Crucially, the costs are a certainty while investment returns are highly uncertain. Whoever is charging them will be paid even if he is helping you to loose money. 

Every investment expert I have come across says that minimizing investment costs is very important, starting from the likes of William Sharpe.  I am surprised in this day and age a vendor would be permitted to say that 0.5% (potential impact of hundreds of thousands over investment lifetime) is “insignificant”. Thats just wrong. 

OldMusicGuy

Nosmo_King_2 said:

One idea was to maybe use the IFA for the personal pension and thereby reducing the fee and then when my company pension was due , maybe doing that myself? Has any one got any thoughts on this?

Just a specific comment on this - this is the worst of both worlds IMO. Either you need an IFA or you don't. If you can manage one pension, you can manage both of them. 

cfw1994

OldMusicGuy said:

You need to educate yourself before you do anything. Start with this book by John Edwards: DIY Pensions: A Simple Guide to Pensions, SIPPs & Retirement Planning. It's clear from your post you don't know enough yet to decide. 

It took me several years to get to the point where I was confident to DIY invest a larger pension pot than yours, but I am glad I did.

Spot on!
My recommendation would be to set aside an hour or so and listen to the videos by Lars at https://www.kroijer.com - I don’t follow the approach perfectly - like a mix of eggs and baskets - but firmly believe the principles are solid: “invest in the world, at as low a cost as possible”.

JohnWinder said:

Those comments make a lot of sense to me. Except in a couple of clear instances I couldn't follow whether the % figures were % or %/year; you'd want to be clear on this. Couple of other points:

If I had to guess I'd say a lot of people would benefit from a financial advisor. It's a pity we've spent decades transitioning from a DB to a DC style pension system without educating the community in retirement savings management, and spawned an industry that one day will be viewed in a better light.

The Americans go on about hourly fees rather than % of assets fees, although the latter are common. Not without merit, but they've a long way to go.

You can be disappointed by plumbers, brain surgeons and I'm sure IFA's. To minimize that, it can help to have some understanding of their work; good luck with brain surgery, but understanding financial planning is not beyond ordinary folk. Then you get into the situation clearly put in this post: 'The paradox of using an advisor is once you know enough to choose a good advisor, you also know enough to manage your own accounts. I would go as far as to say it's risky and irresponsible not to understand good investing principles and yet turn over your savings to someone without understanding what he's doing.' https://www.bogleheads.org/forum/viewtopic.php?t=243740

Not yet mentioned, even if you know how to construct a great plan, an advisor can help you avoid poor, emotionally driven choices at times of market crisis, although some threads recently have sounded like the client should have been doing that to the advisor.

I don't think it's that hard to do it yourself, but if you don't know much then you either simply accept the most plausible bit of advice from an internet forum and need all the luck in the world for it to be suitable for you, or you put in the hard yards to learn enough to properly evaluate the most plausible bit of advice - from whomever.

dunstonh said:

  An in the scheme of things, 0.5% is insignificant.  The markets move by more than that in an hour.  Stockmarkets were down 1.82% on Friday.  You are worrying about a figure less than that. 

The caveat to that is that the 'lost' 1.82% from last Friday will be regained sometime if no one acts recklessly. The, I'll make this plural since it's every year, fees of 0.5%/year on assets won't  come back.

Also spot on, particularly the paradox in bold above!

I’ve said many times how poorly we educate people on money.  I guess the mandatory workplace pensions were intended to help, but many people pay little attention to it.    MSE helps a lot as well.