SIPP/Pension performance predictions?

[mjb1]

My SIPP provider (Best Invest) recently sent me an annual review of my SIPP. They make a projection of what it's value could be when I hit 65. Obviously, that's full of assumptions, a fairly major one being the rate of return of the investments. They've used 5%. I've run a few calculations through a spreadsheet and the return rate appears to make a huge difference to the final size of the pot - just +/-2 around 5% is all it takes.

Obviously, no one knows what the future holds, and the markets are always going have their rallies and falls, which hopefully even themselves out over the long term. It'll also depend on my investment choices of course. So it's a guess as much as anything? I only started my SIPP last year, so I've only got the last 12 months figures to go on. I think it's accepted that the markets have done well over the last year, so I'm well above 5% for that period, and appreciate that it probably isn't typical/sustainable!

Just wondering what return other people's SIPPs have achieved/averaged over the longer term?

[GR_TVR]

I usually estimate 7-8% per year as an average. Just a guess though!
I've only had a pension for a few years. It grew 33% Jun 16 - 17.

[JulianPH]

5% to 7% after charges as an average over a decent time frame, but nothing is guaranteed as it is the underlying investments that generate the returns, not the SIPP/Pension itself.

This is why a well balanced portfolio is so important so that you are not over reliant on a particular market or sector.

[mjb1]

JulianPH said:

5% to 7% after charges as an average over a decent time frame, but nothing is guaranteed as it is the underlying investments that generate the returns, not the SIPP/Pension itself.

This is why a well balanced portfolio is so important so that you are not over reliant on a particular market or sector.

Yeah, I'm just dabbling really when it comes to fund selection. My pot is only about 5k so far, so the stakes don't feel so high, not sure how I'll feel about that in 20 years time. So far, I've found that the platform's recommended/ranked funds have been worse performing than my own punts.

They also advised me to diversify as most of my pot was in equities, so I bought into a suggested property fund several months back, and that hasn't done so well so far.

[JulianPH]

mjb1 said:

JulianPH said:

5% to 7% after charges as an average over a decent time frame, but nothing is guaranteed as it is the underlying investments that generate the returns, not the SIPP/Pension itself.

This is why a well balanced portfolio is so important so that you are not over reliant on a particular market or sector.

Yeah, I'm just dabbling really when it comes to fund selection. My pot is only about 5k so far, so the stakes don't feel so high, not sure how I'll feel about that in 20 years time. So far, I've found that the platform's recommended/ranked funds have been worse performing than my own punts.

They also advised me to diversify as most of my pot was in equities, so I bought into a suggested property fund several months back, and that hasn't done so well so far.

That is the problem, everyone tries to prove their worth to you by giving you their 'expert' advice or opinions. Either hand it to someone professionally qualified and experienced enough to run it for you (an investment manager - not a financial adviser), or do it yourself and save the fees.

Other might disagrre with me, but if you know about certain sectors/markets then don't pay someone. If you don't, then pay an investment manager who does. Financial advisers advise you on many things, but don't (usually) have any permissions to manage investments for you.

[mjb1]

What sort of fees do investment managers charge? How do their returns after fees compare to just chucking everything at an index linked tracker, for example? I guess you'd expect them to do better, but how many actually do in the real world - are we talking more than 50%, almost all of them? Like you say, no guarantees, so presume there's no comeback if they do worse than the market? i.e. how much of a gamble is it to pay a 'professional' to manage the investments? (Not trying to be cynical, I really have no idea).

Also, if I'm doing it myself are funds the best way to spread exposure with my modest pot? My perception was that you need quite a big pot to be able to practically spread it around shares, without having a big exposure to a small no of companies? At what point (if any) does it start to be viable to invest in shares as well/instead?

[SunsetZed]

Don't forget to factor in inflation, it's only the increase above inflation that matters really, 10% pension growth is great with inflation at 2%, not so much if inflation was running at 12%.

[JulianPH]

mjb1 said:

What sort of fees do investment managers charge? How do their returns after fees compare to just chucking everything at an index linked tracker, for example? I guess you'd expect them to do better, but how many actually do in the real world - are we talking more than 50%, almost all of them? Like you say, no guarantees, so presume there's no comeback if they do worse than the market? i.e. how much of a gamble is it to pay a 'professional' to manage the investments? (Not trying to be cynical, I really have no idea).

Also, if I'm doing it myself are funds the best way to spread exposure with my modest pot? My perception was that you need quite a big pot to be able to practically spread it around shares, without having a big exposure to a small no of companies? At what point (if any) does it start to be viable to invest in shares as well/instead?

Investment management charges vary wildly. At the lowest end you can purchase ETFs (Exchange Traded Funds) that track all sorts of things and build you own portfolio (average 0f 0.2% for a combination of these covering all asset classes). The next step up is to have an investment manager actually run this for you. Vanguard offer lifestyle strategies and Parmenion offer discretionary fund management (c. 0.5%). Then you have fund managers (c. 0.75% - 1.75%). There are many more options below 1% and then you have the big discretionary managers which typically charge double this.

If you want to use a platform to hold your assets on there is a fee for this too (0.25% to 0.45%). An adviser will typically a 0.5% to 1% a year onto this.

So it is easy to see how costs can be very low or seriously mount up depending upon how you decide to run things.

My investment management company charges 0.87% all in for everything (including dealing, platform, full investment management, SIPP, ISA, underlying ETFs, etc.). Parmenion is slightly cheaper. Vanguard's lifestyle funds are 0.22%.

Like everything there is price and value. I favour human discretionary management and strong personal service levels over the cheapest options. Others will no doubt have different preferences.

[mjb1]

That's very helpful, thanks.

My SIPP provider offers their own managed funds: https://www.bestinvest.co.uk/our-service/ready-mad...
Annual management charge .75% and ongoing charges around 1.5%. Are they broadly equivalent to Vanguard lifestyle?

[JulianPH]

mjb1 said:

That's very helpful, thanks.

My SIPP provider offers their own managed funds: https://www.bestinvest.co.uk/our-service/ready-mad...
Annual management charge .75% and ongoing charges around 1.5%. Are they broadly equivalent to Vanguard lifestyle?

No problem.

They are much more expensive. Best charge you 0.75% for running your portfolio and then you pay about the same for the underlying funds (as they are active - not passive trackers).

You are therefore paying two sets of management fees in the hope that Best selects funds that out perform the market by at least 1.5% a year.

Compared to Parmenion who charge c. 0.3% and use passives at c. 0.2% giving a total charge of 0.5% (a third of what you are paying best.

Remember that 1% a year saving adds up to one quarter of your growing fund lost in charges over 25 years!

Fiver is half this price and includes advice (which Best does not offer).

My adviser firm offers Intelligent Money (where Quilter Cheviot manage your money - and you normally need £250k before they will look at you) for less that Best, again with full advice.

There is nothing wrong with Best, but they are very expensive for what they offer.

[Jon39]

GR_TVR said:

I've only had a pension for a few years. It grew 33% Jun 16 - 17.

An unusual period, although very satisfying of course.

My guess would be, that your investments probably included a good proportion of large UK companies, where most of their revenue is earned overseas. The June 2016 fall in the value of Sterling, instantly increased the profitability in Pounds, and therefore the value of the businesses.

Not much fun though for the UK importers, when their currency hedging contracts expire.