IFA fees on pension pot

downhillian

I am 67, retired and have a pension pot of around 500k to which I no longer contribute. It is currently with AJ Bell's Passive MPS 3 fund which is not currently giving much of a return. My fees total 1.06%, 0.5% of which goes to my IFA. I should not need to draw on the money for at least 5 years. My questions are a) would I be better off transferring it to a less equity based fund and b) Should I go direct to a non-IFA scheme like Vanquard to cut down on the fee?

El_Torro

Your current fund is 55% equities. Seems OK for a fund already in drawdown. Some people would prefer fewer equities, some would prefer more. If you plan to buy an annuity in 5 years or less then it's probably a good idea to derisk a bit. 

You could get rid of your IFA, it would save you 0.5% a year in fees at least. Are you confident to go it alone? Do you have a drawdown strategy that you plan to follow? Do you feel that your IFA is no longer value for money? If you plan to buy an annuity then your IFA could be of use in finding the right one.

Albermarle

downhillian said:

I am 67, retired and have a pension pot of around 500k to which I no longer contribute. It is currently with AJ Bell's Passive MPS 3 fund which is not currently giving much of a return. My fees total 1.06%, 0.5% of which goes to my IFA. I should not need to draw on the money for at least 5 years. My questions are a) would I be better off transferring it to a less equity based fund and b) Should I go direct to a non-IFA scheme like Vanquard to cut down on the fee?

Most investments have been struggling to show a positive return for the last two years, so no surprise that yours is the same.
It would be easy for you to ditch the IFA and just invest your self in something similar ( and get the same result) for the next 5 years. However when you come to withdraw the money it can get a bit more complicated, and you would need to get familiar with the different withdrawal options. Also the investment may have to be changed around as you approach the time to withdraw ( more held in cash for example).
An IFA can also help with other personal and family finance issues, not just with pensions, but that may not be something that is relevant to you.

Note that there are many investment platforms ( as well as Vanguard) that are happy to deal with the public directly ( without an IFA) and that includes AJ Bell. 

dunstonh

My questions are a) would I be better off transferring it to a less equity based fund

It is impossible to answer without knowing details about your objectives.  However, lack of return is not down to equities. 2022 was a mild loss year but 2023 has equities up about 10 %.    it will be the defensive side of the portfolio (non equities) that has pulled it back.

Your IFA would be a good person to ask this as they will know your objectives.   But if your reason for asking if you should reduce equities because your non-equities holdings have gone down then clearly that would not be the right thing to do as you would be making a decision for the wrong reason.

It would be a bit similar to asking if you should sell the car and get a different one because you got a puncture.

 Should I go direct to a non-IFA scheme like Vanquard to cut down on the fee?

You would remove the IFA charge but you would then need to decide the asset allocation for your portfolio and know what you are doing.

If you DIY well, you can save money.  If you DIY badly then it can be far more costly.    Vanguard neither has the cheapest trackers in most areas or the best performing trackers. It does in a couple of areas though.   Perhaps that explains why the portfolio the IFA has selected only has one Vanguard fund in it.

However, if you want to reduce charges and retain the IFA, you could instruct them to use a cheaper option then AJBells passive portfolio.   AJ Bell is 0.29%.   Vanguard LS is 0.22%  HSBC is 0.17% or if the IFA arranges it themselves on advisory basis (as many IFAs will) then that could be about 0.09%.

JohnWinder

Vanguard neither has the cheapest trackers in most areas or the best performing trackers.

How should we measure the performance of a tracker?

gm0

For the benefit of others

"Performance" technically here is

- Does it follow its defined total return index accurately (Or indices if there is a mix of assets) - to 0.5% or whatever accuracy.

- Are the costs acceptable and competitive (the net fees part)

I suspect the point being made above is that there are a range of cheap broadly follow indices passive funds which follow different variant indices (similar but not identical) and which in some cases have different home market bias (for the multi-asset and global developed equities variants. A UK component that may be at global % capitalisation weight or rather more (VG) or less (World  ex UK)

In recent history some versions have indeed performed differently - to other alternatives. 

The UK market has lagged. So more UK equities from more home market bias has "underperformed" vs other possible choices - even as both do exactly what they say they are going to do.

Of course someone accumulating units (and thus a few more UK ones) may be buying cheap for a future long term gain.  *Nobody knows what the 30 year future holds.

*Though the decline of listings in new growth sectors in the UK stock market and the lingering smell around sterling decline  has been going on for decades and decades now.  And currency FX risk also plays in - which is where the sentiment around home market bias arises in the first instance.

dunstonh

In addition to the above, some trackers do not fully replicate.  Many of Vanguard's trackers are sampled replication rather than full replication.   This, in theory, is to reduce costs.  However, Vanguard trackers are not amongst the cheapest in most areas (no fund house is best in all areas). Cost is an issue as you can get a tracker at 0.06% from one fund house and another fund house charging 0.12%.  That cost difference will be reflected in the return.   And if you look at volatile periods, Vanguard funds seem to be amongst the more volatile trackers covering the same benchmark.   I put that down to sampled replication.    Some fund houses also use slightly different benchmarks to track.   




At the end of the day, the differences will not be much different.  As shown above with a sample of major US equity trackers using OEIC/UT universe.  However, when looking at the figures over 10 years there is 15.37% between top and bottom of this sample.   That difference in return is more than double the annual cost of your IFA.      So, whilst you do need to consider the value of an adviser to you, it is very easy to lose out in other areas if you are not careful. i.e. you could drop the IFA and think you are better off but it could lead to a worse outcome.   

Some DIY solutions are actually more expensive or worse value than using an adviser.  Some are better value and cheaper.  

The portfolio you are in returned 24.9% over the 5 years (to 31st August 2023 - date selected to match the latest factsheet. Used FEfundinfo for data).  Vanguard Lifestrategy 60% returned 18.68%.  Vanguard Lifestrategy 40%  returned 9.34%.  All three are net of fund charges but not platform and adviser charges.   Your portfolio is 55% equities. So, sits between the two but closer to VLS60.

So, had you made the decision five years ago to not use the IFA and go with VLS60, you would have lower charges but a worse outcome.

JohnWinder

So, had you made the decision five years ago to not use the IFA and go with VLS60, you would have lower charges but a worse outcome.

Informative analysis, thanks. 

Both the Bell fund and VLS60 seem to give the managers discretion in the funds’ asset allocation, and they now report slightly different allocations from each other; additionally I have no idea how those allocations would have differed over the last 5 years of Bell’s better returns. So we ought not be surprised one surpassed the other. In view of that, how do we amateurs or the professional advisors identify ahead of time which fund will give better returns over 25 years? In the absence of a secret formula for identifying the better fund in advance, I will suggest that your advisor got lucky, and that those who don’t use an advisor can similarly be lucky or unlucky. I wouldn’t expect ‘a secret formula’ to be publicised, just to be advised that there is one. Any offers?

Bostonerimus1

If you are doing an initial drawdown of 4% your 1.06% fees will be a quarter of your annual withdrawal - so probably your largest expense. It's good to keep costs low when you are in accumulation as they are a long term compounding investment drag and good to keep them low during drawdown because they are a big expense and reduce your spending money, particularly in the important first years. Only you can know if you need an IFA or not, but if you have some basic knowledge, common sense and discipline you can successfully DIY using index funds and multi-asset funds and probably reduce your costs by a factor of 3 or 4.