Pension fund performance - do you monitor yours, how is it doing, do you actively change it?

[danlightbulb]

Problem is UK can't afford many things it did before. Yet future generations will be paying more and more while getting less and less.
One thing that really gets me, the government keeps telling the public their is a need for certain skills, yet if education is not free then how do people even attempt to get those skills.
I personally think there are too many barriers towards getting skills that are needed. And no barriers to free education for skills that are worthless.

This is when Immigration comes to play as education is free or very cheap in other countries.

Completely agree with this. Lots of people here pro immigration and I understand why but like you say it is ultimately passing the buck i.e subcontracting out our own stuff at the expense of our own people's skills and education.

 

[danlightbulb]

Have I missed something? This seems completely counter to what I had understood about the two systems.

It doesn't seem right to me. My salary sacrifice is off my gross salary so I put 12% and my employer puts 6% of gross.

You then obviously only pay tax and NI on what is left after my contribution is deducted.

Because you get the NI saving too, you have to be better off I can't see how you can't be.

 

[danlightbulb]

Yeah, when I keep the pension contribution the same as it is currently, it works out as expected (except I'm obviously paying less into my pension because I'm not getting the 20% relief at source). When I increase my pension contributions to account for the shortfall, I seem to lose out everywhere.

Hard to say without seeing your calculations.

If your salary was £30k and you put 10%.

Under salary sacrifice your pension contribution would be £3k and you'd pay tax/NI on £27k which is £4327.

Under the other method you'd pay tax and NI on £30k which is £5227 leaving you with £24772. If you put 10% of this as your pension that would be £2477 then the pension would claim back 20% on this. Now I'm not sure which way around it works do they say 20% of £2477 which is an extra £495 giving a total of £2972. Or do they say pension contribution X is post tax so pre tax would be X/(1-20%) which is an extra £619 on top of your contribution giving you total of £3096.

So because these calcs include percentages of figures taken at different points that's probably why it isn't quite working. You probably can't just increase your pre tax contribution by 20% and get the same figure at the end.

 

[danlightbulb]

let's say you pay in £100 a month, that would be made up of £80 from your take home pay and then topped up by 25% (£20) in your pension fund = £100
if you pay in using salary sacrifice you would pay in £100 from gross into you pension and pay less tax and NI so you should see a little increase in your take home pay.

Either way you still have £100 in your pension.

Ah that explains it then - they are using 25% top up not 20% (25% being equivalent to the reverse calculation of 20% tax I guess)?

 

[danlightbulb]

Thanks, you were right, I was using 20% instead of 25%. It's better, but it still doesn't quite add up:

Salary/pension contribution figures are rounded for simplicity, and this is using the 2024/25 Tax Year on the Salary Calculator website:


Scenario 1 – At Source Tax Relief

Gross Salary	£50,000
Employee Pension Contribution	£6,600 per year / £550 per month
Tax Relief at source @ 25%	£1,650 per year / £137.50 per month
Total for the above	£8,250 per year / £687.50 per month
Qualified Earnings (between £6,240 and £50,270)	£43,760
Employer Pension Contributions @ 3% of the above	£1,312.80 per year / £109.40 per month
Total pension contributions	£9,562.80 per year / £796.90 per month
Take-home pay after tax, NI, and pension	£34,239.60 per year / £2,853.31 per month

Scenario 2 – Salary Sacrifice

Gross Salary	£50,000
Employee Pension Contribution	£8,250 per year / £687.50 per month
Qualified Earnings (less Salary Sacrifice, between £6,240 and £50,270)	£35,510
Employer Pension Contributions @ 3% of the above	£1,065.30 per year / £88.78 per month
Total pension contributions	£9,315.30 per year / £776.28 per month
Take-home pay after tax and NI using Salary Sacrifice	£33,579.60 per year / £2,798.31 per month

So, under salary sacrifice, my annual pension contributions would be £247.50 less due to the reduced Employer Contributions. But even if that weren't the case, my take-home pay would also be £660 less or £55 per month worse off.

Have I gone wrong somewhere?

Are you sure your scheme definitely takes the employer contributions from qualified earnings and not gross salary?

Are you sure your calcs are right as you've displayed the lower employee contribution under scenario 1 as a deduction from your gross pay not your net pay?

 

[danlightbulb]

So, under salary sacrifice, my annual pension contributions would be £247.50 less due to the reduced Employer Contributions. But even if that weren't the case, my take-home pay would also be £660 less or £55 per month worse off.

Have I gone wrong somewhere?

The way I'd work it out is this.

Say you have £50k salary and put £5k a year into your pension.


Under salary sacrifice that is easy, its 10%.

So you'd have £50k gross, minus £5k pension, gives £45k taxable.

Tax and NI on £45k is £9,727 a year, leaving you after tax& NI with £35,272, plus £5k in your pension scheme.


If taking pension from net pay, you'd be taxed on the full £50k so this would be £11,277 in tax and NI, leaving you with £38,772.

From this you'd then take £4k pension, which would be topped up to £5k later through the tax relief. So you'd have £38,772 minus £4,000 = £34,772. Plus you'd get £5k in your pension the same as before.

This is £500 lower than under salary sacrifice.

With all the above said, I think that the position within public sector may not be quite as clear

Do you think some companies work out the employer pension contribution from net salary if doing if post tax? That's sneaky if so and could completely negate the NI benefits.

 

[danlightbulb]

Yep, the figures in Scenario 1 match what's paid into my pension account. It's definitely 3% of Qualified Earnings not Gross.

So at the moment you're paying your pension post tax anyway aren't you? So your gross salary and qualified earnings are the same figure?

So Im not sure if that helps you to know what they would do under salary sacrifice unless you have specifically asked?

 

[danlightbulb]

I've found the figure £6240 as the threshold for mandatory contribution in a workplace pension. So your company are contributing the bare minimum they can do to comply with the government rules.

Minimum that has to be contributed by your employer​

As part of the overall percentage, the government has also set a minimum percentage that has to be contributed by your employer.

These minimum percentages do not apply to all of your salary. They apply to what you earn over a minimum amount (£6,240 in the 2023-2024 tax year) up to a maximum limit (£50,270 in the 2023-2024 tax year). This is sometimes called ‘qualifying earnings’.

That's harsh.

 

[danlightbulb]

Simple solution is just to extend the retirement date, so that they move you into safer investments at a later date and you have more time in the more risky investments.. fine if you have a means of supporting yourself for that period, like other pension pots and ISAs in case the market takes a tumble.

Default funds are probably still UK heavy though, extending the retirement date doesn't solve this issue.

 

[danlightbulb]

Same story, 37% of this fund is in the magnificent 7 vs about 17% in an all world tracker, this is where the performance comes from.

Yeah I saw the same HSBC Islamic fund in my scheme, outperforming every other fund. Assumed it was something to do with the Middle East, maybe oil or something. Only when I looked at the factsheet did I realise it was the same big US tech companies, like you say at an even greater exposure than a general US equity fund. Its a misleading name in my opinion.

 

[danlightbulb]

What do people think about emerging markets?

Seems to be information out there that EM is underpriced and a big future opportunity. 10-15% EM seems to be the commonly recommended proportion in a portfolio.

But over the past 5 years EM index fund growth is low, at only 10% compared to around 180% in a developed world index.

The Pensioncraft guy said in one of his videos that he doesn't bother with EM.

 

[danlightbulb]

I don't overthink it. Most of it in the S & P 500 and don't think about it. My fund is up tens of thousands just in the last few months.

Yeah Im mostly in world ex uk now as well but in the process of moving my remaining bond funds into equities. Have to decide on whether to include EM in that or not.

 

[danlightbulb]

When looking at a global fund, the USA is like 60% of the world. However the US is only 25% of the global GDP.

China is like 17% of global GDP, but only 2.5% of an all world index.

Basically companies listed in the USA, operate in china, like apple for example.

You are already invested in emerging markets.

Editing the geographical data of funds/ETF to reflect the real world might be useful rather than going by where each company is listed.

So you're saying no need to have an emerging markets fund separately, even if you can't access an all world index?

I agree that big global companies operate across the whole world but without an EM fund you're specifically not invested in companies stationed in some countries like Africa, South America etc.

 

[danlightbulb]

Interesting that the chap on pensioncraft is now recommending a two fund strategy while before he was all in on a single world tracker… not sure when he changed his method but he must be copying me..

I just watched it and am a bit confused. His opening line is that he recommends a two fund approach - a safe fund and a global index tracker. He then goes on to only talk about global tracker options.

So what does he mean by a safe fund? Bonds?

Because I thought the recommended approach now was to go for 100% global index tracker?

 

[danlightbulb]

A safe fund is what you want it to be, a market tracker is not a safe fund… everyone is predicting a market crash at some point.. why? Cos everyone always does… at the moment there’s meant to be an AI bubble.. the housing market is meant to go down further… etc etc etc…

For me my safe fund is the stand fund of my workplace pension; risk cat 4.. like said in my post, I split my work place pension to 50% managed diversified fund which has 40% exposure to the stock market, but this is a managed exposure so someone is picking what stocks is getting brought and sold, 30% into corp/gov bonds and 30% in REITs, money lending, forestry (god knows what this is) etc.

The other 50% is at 45% dev world; risk cat 5 and 5% emerging market; risk cat 6

I also have two frozen pension pots that are DBs; risk cat 1, stocks in the company that I work for via work schemes: risk cat 6, stocks, shares and bonds in ISA, shares in trading accounts..

As one of my original posts says, if you want more exposure to the market, it’s best to just add on another fund to your existing pension plan.. but ******* around with your current pension should be the last thing on your agenda.

Try buying shares or a tracker in an isa first, and see if you can handle the pain of it dropping 25%, 50% even 75% percent.. then imagine what it feels like when it’s 100Ks lost. the FOMO is unreal here, the market is crazy at the moment due to AI, but rest assured.. like what we had with the internet and the housing craze that came and popped, the next craze is around the corner; I’m thinking robotics.

It’s all about how much risk you can handle and how long you have to allow the market to recover, for most people it’s best to let a professional handle it and don’t have to think about it.

I agree with all that but you saw my opening post - my default pension fund was awful in terms of balance. Heavy in UK equities. So I had to change it.

Then the prevailing thinking from here and various YouTubers including DamienTalksMoney and PensionCraft was to just have everything in a world tracker. Forget the bonds. So I started moving towards that.

But now the thinking has changed again?

So which is it? Bonds or no bonds?

 

[danlightbulb]

The issue with bonds, is that a lot has changed in the last 30 years when it comes to the global money market... I was talking about this at work. In the past, a company needed to sell bonds to raise money for development and a lot of the good payouts was buying corp bonds in the right company. The FIRE movement in the 90s suggested that a person can be financially independent from bonds alone but since then they have changed their tune. Companys now don't tend to issue bonds, they have rounds of angel investments or go public. But again, this may change in future, as a lot of angel investors have been burt badly and some IPOs have gone a lot worst than expected, so companies may start issuing bonds again.

The bonds I'm talking about are government bonds / gilts. Traditionally it was 60/40 or 80/20 equities/bonds on some sort of lifestyle path so the equities reduces as you get older. Also UK pensions are unbalanced in UK equities.

Those YouTube channels, and here, have been saying not to bother with this anymore and to go all in global equities, or if you can't get a truly global fund then make your own from say a developed world ex UK fund plus a UK fund (this is my case, as I don't have an all world fund to choose from).

If or when you change your pension scheme, if you have to talk to them.. the person will try and judge your "financial awareness", They wouldn't allow me to opt out of the standard plan on the internet and needed to speak to me first. This is mainly to stop people from being tricked into giving all their pension to a con artist but if the person thinks that you ain't 100% sure of what you are doing and why, they will tell you to speak to an independent financial advisor first and may have you sign off in writting before they will make the changes.

Mine is just all done online, no questions asked. As is my girlfriend's scheme, and she had put her entire portfolio in a property fund up to now.

 

[danlightbulb]

I'm in the process of rebalancing at the moment, didn't want to do it all in one go. Slowly getting rid of the fund with the bonds in.

I'm thinking of overweighting the UK though. 10% instead of 5%. Not sure what to do about emerging markets either. Was aiming for 10% but I have doubts as there is no indication emerging markets will perform at all.

 

[danlightbulb]

10% in UK when we're under 4% of global market cap (IIRC) suggests you're pretty optimistic that we won't continue to stagnate. Hope you're right!

The reason is that I keep seeing information suggesting the UK is undervalued and the US overvalued. That's the primary reason I'm thinking to overweight the UK.

Secondary reason is that it's the home market. Most default pension funds overweight the home market considerably and I'm not sure the reason for it but if there is a reason then it could be valid.

 

[danlightbulb]

I hardly looked at it for 10 years before making my first fund changes 3 years ago. Clearly that was a mistake because of the poor fund choices.

I then got interested in it for a while making some changes before leaving it alone again until now.

So I think that's ok, once I've completed these changes I'll probably move on to something else and not check it regularly like I am at the moment.

 

[danlightbulb]

Define undervalued anyway.

Some price to earnings measures? That's what Ive seen the YT channels talk about but haven't fully researched it myself.

The difference between the markets is that the US has a majority of growth stocks, where the company re-invested their profits in themselves and the prices per share is expected to go up. The majority of the UK market are divided stocks where they give their profits to the share holders, when that happen their share price will be readjusted lower for the dividend payout.

In the ideal world the uk stock price will recover or get higher than their price before the adjustment before the next dividend payout. So the value remains the same but what you have is cash from the dividends which you can reinvest in the same or different company.

Makes sense but if you're invested in UK stocks which give dividends that should come through in the fund returns as well? In my case doesn't that just get reinvested in the same fund?