Pensions: Explain to me why it's a sound investment...

[booyaka]

Well, at least the government is consulting/legislating(?) on introducing a cap on pension fund management fees.

I'm sure they'll make it elsewhere though.

Capping fees is not the answer. All that will do is give a massive limited/restricted pension contract with the option of a default investment fund (tracker) and no other options for investment, no scope for any advice in terms of cost, unless the individual pays a fee out of their own pocket.

all they are trying to do is re-create Stakeholder again - that didn't work the first time, and certainly won't encourage/or work again.

 

[booyaka]

As someone self employed with ZERO pension (aged 34) I'm wondering about how best to go about putting plans in place.

Quite ironic as I'm very interested in equity and precious metal markets, but dont trust pension fund managers to do anything more than just ride the market ups and downs, while taking their kickbacks and management fees.

Obviously not 'tax efficient' but I wonder what would be wrong with, say, overpaying a mortgage on a higher priced house with a view to paying it off 10 years early and using the equity in the house at retirement to buy some kind of buy to let portfolio which would return roughly the same yield as an annuity (6-8%).

Either that or some kind of SIPP where I get to choose the investments, although I don't like these lock outs till age 55 etc.

paying into a pension can be very advantageous as a self employed individual, it can reduce/offest your tax bill due each year by making contributions to a pension.

 

[platypus]

Capping fees is not the answer. All that will do is give a massive limited/restricted pension contract with the option of a default investment fund (tracker) and no other options for investment, no scope for any advice in terms of cost, unless the individual pays a fee out of their own pocket.

Why will it?

 

[PhilGQ]

Capping fees is not the answer. All that will do is give a massive limited/restricted pension contract with the option of a default investment fund (tracker) and no other options for investment, no scope for any advice in terms of cost, unless the individual pays a fee out of their own pocket.

all they are trying to do is re-create Stakeholder again - that didn't work the first time, and certainly won't encourage/or work again.

I generally agree, but I don't think it would hurt to have a cap on the Auto-enrolment defualt fund, as long as the member could could choose to invest in other funds if they wished and could agree advice fees if they want.

 

[PhilGQ]

As someone self employed with ZERO pension (aged 34) I'm wondering about how best to go about putting plans in place.

Quite ironic as I'm very interested in equity and precious metal markets, but dont trust pension fund managers to do anything more than just ride the market ups and downs, while taking their kickbacks and management fees.

Obviously not 'tax efficient' but I wonder what would be wrong with, say, overpaying a mortgage on a higher priced house with a view to paying it off 10 years early and using the equity in the house at retirement to buy some kind of buy to let portfolio which would return roughly the same yield as an annuity (6-8%).

Either that or some kind of SIPP where I get to choose the investments, although I don't like these lock outs till age 55 etc.

It all depends on the numbers and rates.

If you have a good tracker rate on your mortgage <3% then you could probably make more on investing than the interest is on your mortgage.

Also if you need money back out you may not be able to get the bank to re-lend it to you if you have overpaid your mortgage, so not much better than a pension. On the other hand if interest rates go up and your money is in your pension you won't be able to get at it.

A third option is go for a Stocks and Shares ISA, that way if interest rates go up you can get the money out to pay a lump off your mortgage if you need to, while still being tax effecient in the mean time. Of course you have full access to fund so theres nothing to stop you spending it before you are old.

As for a property portfolio, lots of people like this, myself I feel that a mixture assets is the way to go so you never rely on only one thing.

You probley need some help from a decent Financail adviser/planner who can help you arrange your priorities.

 

[booyaka]

Why will it?

Government are wanting to cap fee's at 0.75%.

Why pick on pensions? Why not limit the amount that the Energy companies charge?

Anyway - simple economics dictates that maximum of 0.75% AMC on a fund doesn't cover the cost of running a fund,

All the following and more are part of an investment fund:

registration, audit and depository fees, dealing cost, stamp duty, initial charge etc are just some of the costs involved.

How can you then provide on top of that management of the fund all for 0.75%??

The cap is workable for someone who has either no interest in a pension but is being "forced" into one (auto enrollment) and doesn't want to bother with picking and choosing a fund.

At 0.75%, very few schemes will be able to get actively managed portfolios. It's effectively saying that all schemes will have to be indexed. Basically you would end up "dumbing" down pensions.

After all, if you have a pension fund manager that serially outperforms but charges slightly more than the average, should that manager be forced to reduce its fees? I don’t think so.

“If you start to fiddle with fee structures and make them uniform and vanilla, then you’ll get a uniform and vanilla pensions industry. Given the crisis we are facing, this is not what we need at all right now.

Just as you need diversity of asset class for different risk profiles, so you need diversity of pension provider. The proposals being put forward risk removing that diversity once and for all.

It's about choice - there are loads of tracker funds out there already at 0.3% and up AMC, there are funds out there at 2% AMC.

It's up to individuals to start looking at their choices and deciding what they want - If I want a 2% amc fund - why should I be told I can't have it ???

As is often the case in Government these days, it seems to me rather like somebody got out of bed on the wrong side one morning with the idea of doing something about the pensions industry – but they weren’t sure what that something would be. As a result, they went for the easiest target: fees.

Well said that man!

 

[PhilGQ]

All the following and more are part of an investment fund:

registration, audit and depository fees, dealing cost, stamp duty, initial charge etc are just some of the costs involved.

Dealing fees arn't included in an normal AMC / TER, not sure about the stamp duty.

At 0.75%, very few schemes will be able to get actively managed portfolios. It's effectively saying that all schemes will have to be indexed. Basically you would end up "dumbing" down pensions.

To be honest most people just leave it in the default managed fund anyway. Most (but not all) of these are too big or too lazy or too scared to move far away from the benchmark allocation they are basiclly closet Trackers with Active level fees.

Moving to proper trackers for default arragnments would be a good think I think with AE bringing billions of extra money into the system.

I tottly agree though, if someone wants to invest in other assets at higher cost Property, Hedge Funds, Private Equity etc they should be allowed to. Though I don't see the average GPP or CIMP allowing the latter two.

 

[nucastle]

It all depends on the numbers and rates.

If you have a good tracker rate on your mortgage <3% then you could probably make more on investing than the interest is on your mortgage.

Also if you need money back out you may not be able to get the bank to re-lend it to you if you have overpaid your mortgage, so not much better than a pension. On the other hand if interest rates go up and your money is in your pension you won't be able to get at it.

A third option is go for a Stocks and Shares ISA, that way if interest rates go up you can get the money out to pay a lump off your mortgage if you need to, while still being tax effecient in the mean time. Of course you have full access to fund so theres nothing to stop you spending it before you are old.

As for a property portfolio, lots of people like this, myself I feel that a mixture assets is the way to go so you never rely on only one thing.

You probley need some help from a decent Financail adviser/planner who can help you arrange your priorities.

I have a background in finance, so apart from industry specifics, I don't really need anyone to tell me about balanced portfolios and the like (yawn).

One advantage to paying more into a mortgage, or getting a bigger one, would be you get to live in the house at the same time, and enjoy that, as well as the reduced mortgage payments as the principle is paid off faster.

If houses and stocks barely out perform inflation over the long term, then I'm not sure what the advantage of stock market investing is, unless you are very active in the market.

 

[PhilGQ]

I have a background in finance, so apart from industry specifics, I don't really need anyone to tell me about balanced portfolios and the like (yawn).

One advantage to paying more into a mortgage, or getting a bigger one, would be you get to live in the house at the same time, and enjoy that, as well as the reduced mortgage payments as the principle is paid off faster.

If houses and stocks barely out perform inflation over the long term, then I'm not sure what the advantage of stock market investing is, unless you are very active in the market.

Over the long term I would expect both to outperform inflation by some margin.

My point was more about whether you could earn more on investing (while retaning liquididity) than you save by paying off your mortgage.

The comparsion is not between property and Investment because you own your house anyway. The compariosn is between mortgage and investments.

If you need to upsize your house then thats a different matter.

 

[XE11]

That works out at about 0.88% which isn't to bad for a fund that size in an actively managed investment (although that probably doesn't include dealing costs).


You could get cheaper personally I think up to 0.5% is about right for the fund if its a mixed bag of global assets. My favouite fund manager charges around 0.35% for a global portfolio. You can get it down to 0.1-0.2% if you stick to main markets.

yea, probably should do something about it. lol but retirement seems so ever far away

 

[PhilGQ]

yea, probably should do something about it. lol but retirement seems so ever far away

Agreed, it's easy to put off.

 

[XE11]

My point was more about whether you could earn more on investing (while retaning liquididity) than you save by paying off your mortgage.

effectively thats the fundamental of banking.

banks borrow from random bob, pay him tiny interest, then go and lend the same money to else where at a higher rate.

in other word, paying off mortgage you will save 3% that the lender is charging you, OR you dont pay off the mortgage and pour it into random fund and return 5% which will cover the 3% you suffer and pocket extra 2%.

 

[nucastle]

http://www.247bull.com/ftse-vs-uk-property-vs-gold-vs-cash/

Over the last 10 years, property and precious metals were the only way to actually make a return, versus cash saving and equities markets.

Ironically, I'm a total property bear, standing on the sidelines and having fun while I thought the markets would eventually go into total meltdown. They of course did, but the best we got was a stalling or 20% drop overall.

Makes you wonder if the standard model for pension savings is actually doing us any favours, save propping up the stock markets and earning those boys on Fenchurch Street a nice living

 

[PhilGQ]

I don't think that articlue is particularly great really.

For a start the FTSE 100 has a lot of companies that distribute. So they have ignored dividends which could be significant. They have also ignored Rental yeild on property.

Gold doesn't produce an income so thats the total gain.

Add to that gold is seen a safe haven so it particular bad times (like we've had) it seem like sensible place to be. In different 10 year periord you could have the mirror image of that. They have also ignored gilts which have done well too (capital wise) since interest rates dropped.

Relying on past perfromance and buying what has done well recently, I don't think is the way to select investments.

 

[PhilGQ]

effectively thats the fundamental of banking.

banks borrow from random bob, pay him tiny interest, then go and lend the same money to else where at a higher rate.

in other word, paying off mortgage you will save 3% that the lender is charging you, OR you dont pay off the mortgage and pour it into random fund and return 5% which will cover the 3% you suffer and pocket extra 2%.

Thats the long and short of it.

As long as the investment is liquid you get the money out and pay down the mortgage at any time. Eg when interest rates go up.

There is of course a risk the market could tank and interest rates go up at the same time. So its not without its flaws.

 

[nucastle]

I don't think that articlue is particularly great really.

For a start the FTSE 100 has a lot of companies that distribute. So they have ignored dividends which could be significant. They have also ignored Rental yeild on property.

Gold doesn't produce an income so thats the total gain.

Add to that gold is seen a safe haven so it particular bad times (like we've had) it seem like sensible place to be. In different 10 year periord you could have the mirror image of that. They have also ignored gilts which have done well too (capital wise) since interest rates dropped.

Relying on past perfromance and buying what has done well recently, I don't think is the way to select investments.

Average dividend yield is about 2.8% over the ftse 100, and a decent rental yield would be about 7% if you are buying the right thing.

I'm still unconvinced that the classic pension route the vast majority adopt, is going to be a 'nest egg' to comfortably sustain them in their retirement, assuming the state pension on offer will be nothing more than a pittance.

An article from 2011 had this to say :

Someone retiring today who took out a typical pension 15 years ago, paying in £200 a month, would have been told to expect a pension pot of £106,000. In fact they will receive just £47,474 — having paid in £36,000.
A toxic combination of failing giant pension funds and record low pension payouts has prompted a rethink by the regulator. Money Mail understands the Financial Services Authority (FSA) regulator is finally looking at setting more realistic forecasts to avoid a new generation of savers from falling into the same trap.

 

[PhilGQ]

I'm still unconvinced that the classic pension route the vast majority adopt, is going to be a 'nest egg' to comfortably sustain them in their retirement, assuming the state pension on offer will be nothing more than a pittance.

No doubt about it there are rubbish pensions, just like there are rubbish cars, supermarkets, computers etc etc. Just because some are bad or have had bad performance doesn't mean pensions as a whole are bad. You could buy gold in a pension and avoid Capital gains Tax on the growth if you wanted.

I generally I think a pension should be just one part of retirement planning not the whole thing.

An article from 2011 had this to say :

Someone retiring today who took out a typical pension 15 years ago, paying in £200 a month, would have been told to expect a pension pot of £106,000. In fact they will receive just £47,474 — having paid in £36,000.
A toxic combination of failing giant pension funds and record low pension payouts has prompted a rethink by the regulator. Money Mail understands the Financial Services Authority (FSA) regulator is finally looking at setting more realistic forecasts to avoid a new generation of savers from falling into the same trap.

I can't really argue with the article without looking at the source material.

Edit: just ran some rough figures;

That portfolio would have had to do 3.6%pa (after charges) average to do as bad as it did, that's poor!

To make 106K it would have to do 12.6%pa (after charges), it was never going to do that.

It should be somewhere in between 5-7% after charges I would expect to achieve.

 

[KingOfTheDaves]

An article from 2011 had this to say :

Someone retiring today who took out a typical pension 15 years ago, paying in £200 a month, would have been told to expect a pension pot of £106,000. In fact they will receive just £47,474 — having paid in £36,000.
A toxic combination of failing giant pension funds and record low pension payouts has prompted a rethink by the regulator. Money Mail understands the Financial Services Authority (FSA) regulator is finally looking at setting more realistic forecasts to avoid a new generation of savers from falling into the same trap.

I think a lot of the mistrust in pensions does stem from the optimistic forecasts that were provided back in the 90's.

You have to remember that in the 90's more than any other decade the FTSE 100 was consistently getting returns of 15% year on year rather than the more realistic 7%. As a result there was a lot of unrealistic pension estimates being banded around. It is also where the crazy schemes with 1-2% annual management charges so beloved by watchdog came from.

 

[D.P.]

Even if you only get a 5-7% growth on average, you can easily achieve a 140% return on investment since you invest pre-tax and most employers do some kind of matching.

My US pension is in a managed account with a spread of risk, I really don't look at the details at all. This year to date I have seen an 18% growth, compared with the 0.05% interest rate on my us savings account (even with a 3 year bond I. Would see even single digit interest rates).

 

[King Damager]

The match is pretty much the biggest benefit. It's also invested and can grow in value in some cases.
Often companies will double your input once you're high enough as well (I.e. You put in 1% they put in 2%).
Oh, and if you're in a defined benefit scheme pensions are great. They're just dying out because no one can afford to pay them out.

Personally I feel housing is a good investment but second properties and renting is the way forward IMO

kd