Self employed pension research

InhaleMood

Hi all, I am self employed so would like to start paying back into a pension. I don't have the knowledge to be able to pick individual funds. I've been doing some research on my existing pensions, plus some new options.  Rate of return Total fee 12 months approx 5 years Wealthify Cautious 0.60% 2.54% 15.67% Tentative 0.73% 2.75% 21.18% Confident 0.74% 2.71% 26.59% Ambitious 0.75% 1.70% 29.25% Adventurous 0.77% 0.48% 34.49% Nutmeg Fully Managed (Risk 7/10) 0.94% 11.90% 7.10% Fixed Allocation (Risk 4/5) 0.64% 14.30% 6.00% Vanguard Target Retirement 2050 Fund 0.43% 12.61% 10.77% PensionBee Tailored 0.70% 8.40% 7.71% Tracker 0.50% 2.30% 8.50% Fidelity Multi Asset Allocator Adventurous Fund 0.65% 39.74% 10.08% Scottish Widows Existing 0.75% 26.24% 38.73% Skandia Existing 0.15% 22.55% 30.26% Legal & General Existing 0.18% 23.85% 49.22% Based on the fees and the rate of return, I think Skandia (now Reassure) and L&G look the best options.  I'm aware past performance is not a reliable indicator of future performance, but I'm not sure what else I can base it on. Would anyone have any thoughts on this? It'd be much appreciated Tanya

Marcon

How old are you/what age do you hope to start drawing your pension benefits?

InhaleMood

I'm 37, and probably 67

dunstonh

Based on the fees and the rate of return, I think Skandia (now Reassure) and L&G look the best options. 

The Skandia brand hasn't been active in the UK for very many years.  Skandia bought Selestia and rebranded it to Skandia.    Several years later they stopped issuing the old Skandia Life pensions and rebranded as Old Mutual Wealth.     More recently, they sold the closed OMW Life pensions to reassure and retained the platform which is about to rebrand again to Quilter following a demerger from Old Mutual.

Skandia did have a contract in their PP5 range that could be very cheap but most of their plans are expensive compared to modern alternatives.  

Would anyone have any thoughts on this? It'd be much appreciated 

Decide your risk level first and then do your research.  No point comparing different levels of investment risk.  Generically, the more you move up the risk scale, the higher the charges tend to be.       Forget about looking at 12 months returns.     And if you do compare performance, make sure it is exactly the same dates.  Otherwise the comparisons are meaningless and could be significantly different (for example there was a crash over 2015/16 and if the 5 year period includes that the figures would be lower than a 5 year period that doesnt include that)

You seem to be focusing on charges but they are a secondary concern.  Not a primary one.  How and where you invest is primary but you haven't mentioned that with the existing pensions.

Albermarle

You are mixing up different statistics , so not comparing apples with apples.

Return over 5 years vs annualised return .

Fidelity

Multi Asset Allocator Adventurous Fund

0.65%

5 year

10.08%

This is 10% annualised , which means 50% in total over 5 years .

Legal & General

Existing

0.18%

5 years

49.22%

- This is the total so in fact both funds have performed almost exactly the same .

Also the 12 month figures are currently misleading , as the market bottomed out due to Covid just over 12 months ago and then recovered ever since . So the figures look unnaturally high .

JohnWinder

That’s a good start to comparing, but in case it’s not in your consciousness, it’s better to start a step backward by deciding on how risky you are prepared to be with the investments. Why? In general, higher returns come from more ‘risky’ assets, meaning those assets like shares or high yield bonds which can be expected to fluctuate in value much more than government bonds or savings accounts. Generalising horribly, someone as young as you with plenty of earning years ahead can allow themselves to take more risk than someone about to retire with no prospect of wage earning again if the stocks part of their investments take a big tumble with a pandemic or worse. To give yourself a more quantitative idea of all this, have a look at multi-decade charts of UK stocks or US stocks’ prices to see how they fluctuate over the years. A 50% drop in value happens every decade or two, and can take several years to regain the lost ground.

Back to your list: you’re wise to consider fund costs, even if it’s not a primary consideration, because many 37 year olds have a 50 year investing horizon (since they won’t die before age 87), and a 0.5%/year extra charge can reduce your final investments value by 20% - that’s a lot to lose out on if you don’t need to. Don’t take my word for 20%, use an online compound interest calculator and put in some sample figures for how much you’re starting with and how much you’ll add each year, and try two different growth rates (one that is 0.5% bigger than the other).

It’s hard to ignore the sort of growth figures you’ve given, but try to, giving them only the slightest worth. We’ve just heard of the errors that can arise if the start/finish dates are not exactly the same, and even if they are the same for two funds if you change those dates by 6 months (now starting your 5 year period 6 months later than you already did) you could get very different return results for both funds. 

In addition, it’s near meaningless to compare returns unless you compare the riskiness of the investments. A bond fund can carry very little risk and give modest returns, while a stock fund is more risky but is likely to give better returns. And I doubt a risk rating on both funds of ‘7’, or whatever, makes them properly comparable for returns. The only returns to compare are risk adjusted returns (with something like a Sharpe ratio); that information is not so readily available which keeps the punters in the dark, intentionally or not. And the shorter the return period, the less useful it is.

As a general rule, the DIY investor is well served by broadly diversified, low cost, funds tracking good indexes. You don’t need ‘actively managed’ funds as they most commonly don’t justify their costs because they commonly underperform index funds, that carry the same risk level, over periods exceeding about 5 years, but if an ‘active’ fund is broadly diversified enough to be an index fund in disguise then not much harm done.

InhaleMood

Albermarle said:

You are mixing up different statistics , so not comparing apples with apples.

Return over 5 years vs annualised return .

Fidelity

Multi Asset Allocator Adventurous Fund

0.65%

5 year

10.08%

This is 10% annualised , which means 50% in total over 5 years .

Legal & General

Existing

0.18%

5 years

49.22%

- This is the total so in fact both funds have performed almost exactly the same .

Also the 12 month figures are currently misleading , as the market bottomed out due to Covid just over 12 months ago and then recovered ever since . So the figures look unnaturally high .

Ahh big mistake there, I will take another look. Thank you!

InhaleMood

JohnWinder said:

That’s a good start to comparing, but in case it’s not in your consciousness, it’s better to start a step backward by deciding on how risky you are prepared to be with the investments. Why? In general, higher returns come from more ‘risky’ assets, meaning those assets like shares or high yield bonds which can be expected to fluctuate in value much more than government bonds or savings accounts. Generalising horribly, someone as young as you with plenty of earning years ahead can allow themselves to take more risk than someone about to retire with no prospect of wage earning again if the stocks part of their investments take a big tumble with a pandemic or worse. To give yourself a more quantitative idea of all this, have a look at multi-decade charts of UK stocks or US stocks’ prices to see how they fluctuate over the years. A 50% drop in value happens every decade or two, and can take several years to regain the lost ground.

Back to your list: you’re wise to consider fund costs, even if it’s not a primary consideration, because many 37 year olds have a 50 year investing horizon (since they won’t die before age 87), and a 0.5%/year extra charge can reduce your final investments value by 20% - that’s a lot to lose out on if you don’t need to. Don’t take my word for 20%, use an online compound interest calculator and put in some sample figures for how much you’re starting with and how much you’ll add each year, and try two different growth rates (one that is 0.5% bigger than the other).

It’s hard to ignore the sort of growth figures you’ve given, but try to, giving them only the slightest worth. We’ve just heard of the errors that can arise if the start/finish dates are not exactly the same, and even if they are the same for two funds if you change those dates by 6 months (now starting your 5 year period 6 months later than you already did) you could get very different return results for both funds. 

In addition, it’s near meaningless to compare returns unless you compare the riskiness of the investments. A bond fund can carry very little risk and give modest returns, while a stock fund is more risky but is likely to give better returns. And I doubt a risk rating on both funds of ‘7’, or whatever, makes them properly comparable for returns. The only returns to compare are risk adjusted returns (with something like a Sharpe ratio); that information is not so readily available which keeps the punters in the dark, intentionally or not. And the shorter the return period, the less useful it is.

As a general rule, the DIY investor is well served by broadly diversified, low cost, funds tracking good indexes. You don’t need ‘actively managed’ funds as they most commonly don’t justify their costs because they commonly underperform index funds, that carry the same risk level, over periods exceeding about 5 years, but if an ‘active’ fund is broadly diversified enough to be an index fund in disguise then not much harm done.

Thank you for your in depth feedback, very helpful!
Are you able to expand upon the below? What should I be looking at? 
Broadly diversified - is there a generally accepted good mix?
Low cost - my current pensions seem to be below 0.2% whereas the new ones are 0.5% and above - does that sound right?
Good indexes - what does a good index look like?

Thank you!

JohnWinder

I was hoping you wouldn’t ask those hard questions.

The theory, of Nobel prize quality, is that for equities the best return for the risk you take is to own a fund which represents the whole market accurately; it’s called a capitalisation weighted index, in that the value of each stock in the index is proportional to how many shares are available for trading multiplied by the price of each share, and it covers every share available. These are often called all cap (all sizes of capitalisation, from the biggest to the smallest company) and global (covering the whole world in proportions reflecting each major national stock market). There are plenty of reasons for your funds to deviate from that, like availability, preference for some bias towards your own country’s shares, concerns that emerging markets are full of under-regulated cowboys, or that tiny companies just aren’t worth worrying about. Most of that is small print compared to broadly diversified and cap weighted, although equal weighting of shares rather than cap weighting isn’t the worst thing you can do, but it’s unnecessary complication (fewer choices, more cost, similar performance and risk).

Diversification is what you’re after, reducing the risk of any one company, or country’s stocks or industry’s stocks biting the dust. With bonds, diversification is less important because government bonds have very little risk of default (if you have a decent government). High credit corporate bonds are unnecessary, but not evil; if you want the slightly better return they offer, for the slightly increased risk compared to government bonds, just own more shares and less government bonds. Keep it simple.

0.2%/year is low cost these days. 0.5%/year isn’t the worst, but it needs to be justified. In a few years, with current trends, 0.2%/year may look dear.

A good index is much like the description of a good fund, above. A good fund follows a good index, and does it with little deviation in returns from the index. That’s something to look for in a fund - closeness of index tracking.

There are about 7000 stocks available globally, maybe 9000; you get the idea. There are almost that many indexes, maybe more. Since index investing became the smart thing to do 40 years ago, the way to sell investments is to label them index funds. So some fund providers invent their own indexes, I think HSBC does this, and puts together funds to track those indexes. That way no one can compete with their funds, and do better, because they simply don’t license the index for anyone else to use, and no one can validly say ‘our fund does better than yours’ because no one else uses an index resembling HSBC’s enough.  I’d avoid those, although a close look might suggest they’re well diversified, cap weighted etc. and acceptable.

And index developers can make money licensing their index, so everyone is out to invent an index that shows good growth with little risk. So, they come and they go.

Decent indexes will pass the test of time; the indecent ones fold too quickly which helps weed them out but more pop up and it’s a nuisance if yours closes. SandP make reputable indexes, as do MSCI and Barclays and FTSE. The fine print includes consideration of how frequently stocks move into and out of the index, as this adds cost and causes losses with buy/sell spreads and front-running (clever people seeing that a stock is about to enter the index, and thus get bought up, and buying it up beforehand). Ignore all that stuff.

A satisfactory stock index might be global in its coverage but omits Japan because they think Japan has a poor future with its stagnant population. The omission is only of about 10% of the global stocks, so it’s not huge ‘bet’ on the future and won’t make a big difference to your returns either way, but really I think it’s easiest to just stick with something reflecting the entire market.

The beauty of this type of investing is that it’s hard for the professional to get better risk adjusted returns. Just because a smart person said it, and it might sound cute, doesn’t make it true, but there is a ring of truth about: 'When the dumb investor realises how dumb he is and buys an index fund, he becomes smarter than the smartest investors.'

https://www.sensibleinvesting.tv/NewWebsiteAreaDev/documents/20bc7183-1d01-4ba8-b026-663b7f701d34/how-to-win-the-losers-game-part-6

InhaleMood

JohnWinder said:

I was hoping you wouldn’t ask those hard questions

Thank you, that's really helpful.
I did a little research yesterday. Does something like this look reasonable?

Equities
North American 28%
UK 15%
European 8%
Global Emerging Markets 4%
Japanese 4%
APAC 2%

Global Fixed Interest 26%
UK Gilts 6%
UK Index Linked 3%
UK Corporate Fixed Interest 3%

AlanP_2

At 37 with 40-60 years ahead of you (hopefully) I wouldn't bother with bonds, or if I did it would be down at the 10-15% range.

Your target at the moment is to grow the pot as big as possible before you start living off it and equities will typically provide the greater returns.

You haven't said how much you have in pensions currently or how much you are going to be adding but until you get to at least £50k, and some would say in to 6 figures, don't bother with individual funds. Use a multi-asset or global fund instead.

Multi asset examples are Vanguard Life Strategy, HSBC Global Strategy, Blackrock My Map and Multi-Index range from L&G.

These combine equities & bonds (and with a few property as well) in varying allocations to offer a range of low cost "risk" based funds from say 20% equities for low growth / safe to 80% equities for higher growth. So you pick the risk / reward level you feel comfortable at.

Global trackers are offered by all the big fund companies like Fidelity, Vanguard, HSBC, Blackrock (under the iShares brand) etc. They will all track one of the global indexes and the returns will be very similar. One might include EM, another won't. One might include smaller companies, another won't. Returns are still similar though and the more companies / markets you want covered the higher the cost (fractions of %).

Take a look at the monevator.com website for lots of articles and discussion around these sort of topics.