Pensions - are everyone's losing money or just mine
Discussion
Foliage said:
Someone has to lose money so others can gain it. If your in a +% count yourself lucky in the current climate.
That, my friend, is fundamentally wrong. It's simply not the way investing the stock market works. You are confusing investing with gambling.Investments are made with the objective of "creating value" and it generally works, so 2+2=5
Gambling is one person trying to outwit another in the absence of any creative process, so 2+2=4
kingston12 said:
Thanks Julian for the interesting and detailed reply. I am going to spend some time looking into this over the weekend.
The 15% is the maximum that my employer will contribute. In all the pension schemes I have had, I have always made sure I am getting the maximum employer contribution - as you say it is free money! I have never paid in any more than that as the returns have been so poor.
I totally agree with you about paying a percentage of the full fund value - that really seems like money for nothing. I'd be happier paying a percentage of the amount of money the fund actually increases by as it would incentivise the fund managers to actually make some profit for me!
If you are getting a 15% pension contribution from your employer you are laughing. If you have been getting this since you started working and making the same contribution you are on your way to a 2/3rds final salary equivalent. The 15% is the maximum that my employer will contribute. In all the pension schemes I have had, I have always made sure I am getting the maximum employer contribution - as you say it is free money! I have never paid in any more than that as the returns have been so poor.
I totally agree with you about paying a percentage of the full fund value - that really seems like money for nothing. I'd be happier paying a percentage of the amount of money the fund actually increases by as it would incentivise the fund managers to actually make some profit for me!
The simple fact in life is that if you don't save 1/3rd throughout your working life you will never be able to get 2/3rds in retirement. With a 15% employer contribution and your savings to date it looks like you are on your way... Bloody well done!
Ozzie Osmond said:
Foliage said:
Someone has to lose money so others can gain it. If your in a +% count yourself lucky in the current climate.
That, my friend, is fundamentally wrong. It's simply not the way investing the stock market works. You are confusing investing with gambling.Investments are made with the objective of "creating value" and it generally works, so 2+2=5
Gambling is one person trying to outwit another in the absence of any creative process, so 2+2=4
So are we all better off? Yes. Are we creating value? Yes, again. Does one person's increase in wealth detract from the wealth of someone else? Probably not in the slightest. As always, it depends upon the circumstances.
If I do well with my money does that mean I have deprived someone else of being able to do well with their money? No! Not at all!
The concept of a finite amount of wealth/money needs to balanced with the same concept of debt.
The available money/wealth on the planet has never been finite and is every constantly increasing. So to suggest that someone has to lose for another person to gain is a naive argument, but an interesting one (particularly when you factor in the level of global debt).
Right, I'm off to eat! Julian
JulianPH said:
This is an interesting philosophical point.
I think it's really the whole capitalist/socialist debate. At the end of the day "value" can only come from owning stuff (being an Arab who after several millennia wandering about the desert realises he's sitting on an oil well) or by work. A capitalist will see "doing work" as adding value; a socialist will see "doing work" as exploitation of the proletariat.Either way, whilst some people may choose to gamble on the stock market that's not the same thing as investing in the stock market.
In the context of pensions the government effectively "gives you some free extra money to invest" so if you're going backwards then,
- markets have taken a very severe downturn, and/or
- you've got the wrong investments, and/or
- you're being charged fees which are far too high.
JulianPH said:
If you are getting a 15% pension contribution from your employer you are laughing. If you have been getting this since you started working and making the same contribution you are on your way to a 2/3rds final salary equivalent.
The simple fact in life is that if you don't save 1/3rd throughout your working life you will never be able to get 2/3rds in retirement. With a 15% employer contribution and your savings to date it looks like you are on your way... Bloody well done!
It is an excellent contribution, but only started this year when I turned 40! Before that I have got a few years where they contributed 12%. Earlier in my career it was often more like 6% (3% each from me and my employer).The simple fact in life is that if you don't save 1/3rd throughout your working life you will never be able to get 2/3rds in retirement. With a 15% employer contribution and your savings to date it looks like you are on your way... Bloody well done!
I haven't looked at how my current employers scheme is doing (and in the past it hasn't been as bad as the earlier ones), but if it keeps around 0-1% return, it still won't add up to that much despite the healthy amount going in.
kingston12 said:
JulianPH said:
How much of the 15% contribution to your work scheme is made by your employer? This seems a sensible level and if they will make further contributions if you do I would max this out as much as you can afford. It is free money.
With your old schemes I would call each provider and ask if you have any additional benefits you may not be aware of (guaranteed annuity rate, minimum guarantees, etc.) and also check there are no exit/transfer charges (sometimes it helps to ask for a current value and then ask for a transfer value - the two may not necessarily be the same, despite them telling you there are no exit/transfer penalties!).
If you do have any additional benefits then you need to weigh up whether you are better to stay put or better to start afresh. Post back here if you are not certain about anything.
If you do consolidate and start anew then with at least 25 years for investment you could afford to take a higher degree of risk now, lowering this as you approach retirement.
For the cheapest and simplest solution you could go with a Vangaurd 80(equity)/20(bond) lifestyle fund and move to 60/40 and then 40/60 as you get closer to retirement. With five years to go you should know what you want to be doing with this pension money (income drawdown, withdrawal, annuity, combination).
If you need a lump sum for withdrawal (tax free cash and annuity purchase) you could look at the 20/80 strategy to really reduce volatility in the final few years. For money you want an income from start looking for a good income investment (again a mixture of equity income and bonds) ahead of drawing the income. I believe it is prudent to only draw in any year the income generated in the previous year - so you do not erode your pot. Remember to leave some invested to account for inflation too.
You could look instead to pay extra for a fund manager or model portfolio service from a DFM (which is basically exactly what you would get from full on DFM at half the price) to run your pension money. Neil Woodford has a fantastic track record for generating income and growth and really adding value for his fee.
You may also want to keep a small part of your funds aside for self investing into specialist funds/ETFs/stocks. This can be interesting and fun if you do your research and stick with what you know! Look at your employment sector - any investment opportunities you can see and understand? The same with your general interests. Stick with listed companies/bonds though and/or regulated investments.
The whole thing can be very interesting when you get into it, and very satisfying too.
Finally, if you take the time to learn about the different tax wrappers (pension/SIPP/ISA being the main ones) and the investment options available to you you shouldn't need to pay a financial adviser, but if you do need to make sure it is a fixed fee for the hours spent.
I have never understood why people agree to pay away a proportion of their entire investment portfolio each and every year for advice. It's like paying away a proportion of the value of your house every year to get advice about what improvements could make it worth more when you sell it!
Thanks Julian for the interesting and detailed reply. I am going to spend some time looking into this over the weekend.With your old schemes I would call each provider and ask if you have any additional benefits you may not be aware of (guaranteed annuity rate, minimum guarantees, etc.) and also check there are no exit/transfer charges (sometimes it helps to ask for a current value and then ask for a transfer value - the two may not necessarily be the same, despite them telling you there are no exit/transfer penalties!).
If you do have any additional benefits then you need to weigh up whether you are better to stay put or better to start afresh. Post back here if you are not certain about anything.
If you do consolidate and start anew then with at least 25 years for investment you could afford to take a higher degree of risk now, lowering this as you approach retirement.
For the cheapest and simplest solution you could go with a Vangaurd 80(equity)/20(bond) lifestyle fund and move to 60/40 and then 40/60 as you get closer to retirement. With five years to go you should know what you want to be doing with this pension money (income drawdown, withdrawal, annuity, combination).
If you need a lump sum for withdrawal (tax free cash and annuity purchase) you could look at the 20/80 strategy to really reduce volatility in the final few years. For money you want an income from start looking for a good income investment (again a mixture of equity income and bonds) ahead of drawing the income. I believe it is prudent to only draw in any year the income generated in the previous year - so you do not erode your pot. Remember to leave some invested to account for inflation too.
You could look instead to pay extra for a fund manager or model portfolio service from a DFM (which is basically exactly what you would get from full on DFM at half the price) to run your pension money. Neil Woodford has a fantastic track record for generating income and growth and really adding value for his fee.
You may also want to keep a small part of your funds aside for self investing into specialist funds/ETFs/stocks. This can be interesting and fun if you do your research and stick with what you know! Look at your employment sector - any investment opportunities you can see and understand? The same with your general interests. Stick with listed companies/bonds though and/or regulated investments.
The whole thing can be very interesting when you get into it, and very satisfying too.
Finally, if you take the time to learn about the different tax wrappers (pension/SIPP/ISA being the main ones) and the investment options available to you you shouldn't need to pay a financial adviser, but if you do need to make sure it is a fixed fee for the hours spent.
I have never understood why people agree to pay away a proportion of their entire investment portfolio each and every year for advice. It's like paying away a proportion of the value of your house every year to get advice about what improvements could make it worth more when you sell it!
The 15% is the maximum that my employer will contribute. In all the pension schemes I have had, I have always made sure I am getting the maximum employer contribution - as you say it is free money! I have never paid in any more than that as the returns have been so poor.
I totally agree with you about paying a percentage of the full fund value - that really seems like money for nothing. I'd be happier paying a percentage of the amount of money the fund actually increases by as it would incentivise the fund managers to actually make some profit for me!
Ozzie Osmond said:
In summary, on the stock market everyone can win. This is presumably why tracker funds can be a viable strategy.
Not sure I agree, the FTSE was higher in the year 2000 than it is today. If the company you are invested in isnt creating value then the price will go down over time, and there are serious questions about how much value a lot of companies are creating these days. Growth has stagnated for most companies and some large companies are actually going backwards by paying out larger dividends than their profit, and selling assets to do so (BP the most obvious example).
Condi said:
Not sure I agree, the FTSE was higher in the year 2000 than it is today.
If the company you are invested in isnt creating value then the price will go down over time, and there are serious questions about how much value a lot of companies are creating these days. Growth has stagnated for most companies and some large companies are actually going backwards by paying out larger dividends than their profit, and selling assets to do so (BP the most obvious example).
Dividends, everyone forgets dividends, run those numbers with reinvested dividends and take another look.If the company you are invested in isnt creating value then the price will go down over time, and there are serious questions about how much value a lot of companies are creating these days. Growth has stagnated for most companies and some large companies are actually going backwards by paying out larger dividends than their profit, and selling assets to do so (BP the most obvious example).
I wrote this nearly three years ago, and generally, it stands the test of time.
<<The figure itself is pretty irrelevant though because it has no value apart from assessing the value of the 100/250/350 largest companies in the UK stock market if they were all to be sold off a the same time, in some hypothetical snap auction. But the very fact that this mythical figure was also previously achieved 13 years ago will create lots of talk of being “no better off than you were in 1999 and more worse off due to inflation” etc. Those same experts and observers will say equities have been a poor investment over that period because they are simply back to where they were.
But they’d be wrong. And here’s why. Since 1999, UK companies have also paid out about £750 billions in dividends back to clients and people like you and me, and back into the stock market. Compounded up over the period has generated a total return of over 50%. AND that includes dividends disasters like BP and the credit crunch. But a dividend is simply an entitlement to surplus cash flow from a business and as such, that entitlement has a huge value (the share price). Let’s look at what a share is again – in essence, a percentage of the ownership of a company. As such it only has value if that company generates surplus cash which can be distributed to shareholders as dividends. As a piece of paper giving ownership it has no intrinsic value.. like my lawnmower or trainers, a share can just sit there doing nothing.
There’s always a downside though, and in the interest of balance, here it is. Reuters yesterday reported that British companies posted lower than expected dividend growth in the third quarter, with total payouts for the year now set to be below 2012’s record level. While the £25.3 billions payout in July to September represented a 5.7 percent increase year on year, dividends actually fell compared to the previous quarter for the first time in five years. But next year, the one-off windfall from Vodafone’s special dividend, following the sale of its stake in Verizon Wireless to Verizon, should see the 2014 total top £100 billions for the first time since well, in a long time. And practically every fund manager has Vodafone somewhere.
Why are dividends so important right now? Because of financial repression. The good old fashioned Divi has become increasingly sought after as state policy has helped keep yields on bonds low, compelling us all to look for other streams of dependable income. There is of course a huge difference between the bond yields and dividends. One is an uncertain but inflation proofed and the other is more certain but is a nominal return that will be eroded by inflation. It is difficult to know which is best. However, it is certainly true that the cost of buying income in the UK has soared (as annuity purchasers can tell you!).
So in a nutshell, what is better? A guaranteed income but a more expensive one? If income from bonds is expensive is there any reason why income from equities should be much cheaper? If not then the price of buying an option on dividends from UK companies must rise.. In other words, the FTSE (and other equity based indices) should go up. Maybe Neil Woodford saw the writing on the wall last week. As for me.. well, I’m not so sure. Equities are still an invaluable asset for an investor to hold, even if we’re probably in for a choppy ride for two or three years. We lose sight of the fundamentals at our peril. In the end long term investing is more (ultimately) about ensuring income to achieve objectives than it is sitting on ever increasing potential capital gains liability, so dividend income (and safe diversification) is a credible way of mitigating risk along the way.>>
<<The figure itself is pretty irrelevant though because it has no value apart from assessing the value of the 100/250/350 largest companies in the UK stock market if they were all to be sold off a the same time, in some hypothetical snap auction. But the very fact that this mythical figure was also previously achieved 13 years ago will create lots of talk of being “no better off than you were in 1999 and more worse off due to inflation” etc. Those same experts and observers will say equities have been a poor investment over that period because they are simply back to where they were.
But they’d be wrong. And here’s why. Since 1999, UK companies have also paid out about £750 billions in dividends back to clients and people like you and me, and back into the stock market. Compounded up over the period has generated a total return of over 50%. AND that includes dividends disasters like BP and the credit crunch. But a dividend is simply an entitlement to surplus cash flow from a business and as such, that entitlement has a huge value (the share price). Let’s look at what a share is again – in essence, a percentage of the ownership of a company. As such it only has value if that company generates surplus cash which can be distributed to shareholders as dividends. As a piece of paper giving ownership it has no intrinsic value.. like my lawnmower or trainers, a share can just sit there doing nothing.
There’s always a downside though, and in the interest of balance, here it is. Reuters yesterday reported that British companies posted lower than expected dividend growth in the third quarter, with total payouts for the year now set to be below 2012’s record level. While the £25.3 billions payout in July to September represented a 5.7 percent increase year on year, dividends actually fell compared to the previous quarter for the first time in five years. But next year, the one-off windfall from Vodafone’s special dividend, following the sale of its stake in Verizon Wireless to Verizon, should see the 2014 total top £100 billions for the first time since well, in a long time. And practically every fund manager has Vodafone somewhere.
Why are dividends so important right now? Because of financial repression. The good old fashioned Divi has become increasingly sought after as state policy has helped keep yields on bonds low, compelling us all to look for other streams of dependable income. There is of course a huge difference between the bond yields and dividends. One is an uncertain but inflation proofed and the other is more certain but is a nominal return that will be eroded by inflation. It is difficult to know which is best. However, it is certainly true that the cost of buying income in the UK has soared (as annuity purchasers can tell you!).
So in a nutshell, what is better? A guaranteed income but a more expensive one? If income from bonds is expensive is there any reason why income from equities should be much cheaper? If not then the price of buying an option on dividends from UK companies must rise.. In other words, the FTSE (and other equity based indices) should go up. Maybe Neil Woodford saw the writing on the wall last week. As for me.. well, I’m not so sure. Equities are still an invaluable asset for an investor to hold, even if we’re probably in for a choppy ride for two or three years. We lose sight of the fundamentals at our peril. In the end long term investing is more (ultimately) about ensuring income to achieve objectives than it is sitting on ever increasing potential capital gains liability, so dividend income (and safe diversification) is a credible way of mitigating risk along the way.>>
gibbon said:
Condi said:
Not sure I agree, the FTSE was higher in the year 2000 than it is today.
Dividends, everyone forgets dividends, run those numbers with reinvested dividends and take another look.Even without reinvestment, dividends of say 4% a year will have delivered a return of 4% x 16 years = 64%
In reality no-one will have been unlucky enough to invest everything at the peak so real world returns should be even better.
The key thing with pensions is putting it in a global tracker fund which self balances (and reinvests dividends), hence has very low fees.
Looking long term, even 1% will make a massive difference to the pot. Just have a look at some pension projections / calculators online.
If you regularly funnel as much money you can into a fund like Vanguard LifeStrategy you will do ok in old age. If you do this and manage to get a couple of BTL houses you will live comfortably.
If you have a crap pension product throughout your life, with high fees and don't contribute enough, and have no other assets, your old age is going to be dire.
Looking long term, even 1% will make a massive difference to the pot. Just have a look at some pension projections / calculators online.
If you regularly funnel as much money you can into a fund like Vanguard LifeStrategy you will do ok in old age. If you do this and manage to get a couple of BTL houses you will live comfortably.
If you have a crap pension product throughout your life, with high fees and don't contribute enough, and have no other assets, your old age is going to be dire.
Edited by Jiebo on Wednesday 28th September 21:05
kingston12 said:
I have decided to do something about my various pension pots that I have scattered about from previous jobs.
None of them are worth very much, but I have noticed that they each tend to make a fairly significant 'investment loss' each year. They are all invested in what the various providers describe as medium risk funds.
Is this happening to everyone else, or are pensions just a bit like other financial products where if you don't update your 'deal' every few years they start penalising you?
"Medium Risk Fund" means you take all the risks yet the provider has no risks, always getting their ~1% e.g. If you live for another 50 years, they take 50% (not quite mathematically but you get the point).None of them are worth very much, but I have noticed that they each tend to make a fairly significant 'investment loss' each year. They are all invested in what the various providers describe as medium risk funds.
Is this happening to everyone else, or are pensions just a bit like other financial products where if you don't update your 'deal' every few years they start penalising you?
Have a read of the monevator site, learn about low-cost passive funds. I hate to think what charges you are paying.
I have a Hargreaves Lansdown SIPP, split between 20+ shares, cash and the odd investment trust so my overall charges are <0.1%. They will do the transfer-in paperwork for you without extra charges.
I piled in on the last FTSE100 drop to 5500 and the post-Brexit dip so up 20% so far this year with the divis rolling in nicely.
Might go up, might go down but at least I'm not funding the parasites along the way, getting great tax relief and employer contributions.
You have to learn the system or will get fleeced for tens or hundreds of thousands of pounds.
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