Pension question

[hacksaw]

Hoping to try to get a little guidance on pensions. I'll be honest, I'm pretty naïve with this kind of stuff.

I'm 41 years old, have a final salary BAE pension which is currently frozen, which I contributed into for about 8 years. I'm happy to leave this where it is.

I currently contribute to a company pension scheme ran with Aegon. Plan value is around 100K, with continued contributions of around 7k a year being added by myself and employer. Plan is currently invested in Universal Lifestyle Collection.

Is there a better choice of fund which I could be looking to invest in?

Many thanks.

[sidicks]

hacksaw said:

Hoping to try to get a little guidance on pensions. I'll be honest, I'm pretty naïve with this kind of stuff.

I'm 41 years old, have a final salary BAE pension which is currently frozen, which I contributed into for about 8 years. I'm happy to leave this where it is.

I currently contribute to a company pension scheme ran with Aegon. Plan value is around 100K, with continued contributions of around 7k a year being added by myself and employer. Plan is currently invested in Universal Lifestyle Collection.

Is there a better choice of fund which I could be looking to invest in?

Many thanks.

Better in what way?
Cheaper?
Less risky?
Less volatile?
Better growth potential?

[Monkeylegend]

Depends on what you are looking to achieve and your attitude to risk.

I had my fund with Aegon but moved it 3 years ago after a very uninspiring performance, and I found them somewhat lacking on the customer service front, and when dealing with tax situations.

I moved to the Prudential, many others are available, but my fund has performed much better, last year it grew by 15.3% and I am on a fairly conservative risk strategy, and they are so much more professional in my dealings with them.

You need to speak to an impartial pensions/ finanancial advisor, but I think you will find better than Aegon out there.

[outnumbered]

If his employer is contributing to his pension, it's unlikely he'll be able to switch provider IME. And his employers contributions will be worth far more than anything he'd gain from using another provider.

I agree the main questions are about what is your time horizon, end goals, dependents and risk levels you want to accept.

Once you can answer those, people can advise on a broad strategy.

[hacksaw]

Thanks chaps, as mentioned, I cant move away from Aegon, for exactly the reasons above.

I'm not planning on a super early retirement, early 60's most likely, probably once wife reaches 60, making me 62 or 63. If I'm still in good health and enjoying work, I may continue beyond this. So still 20 years + contributions to make.

I guess what I'm asking, this fund is the standard fund that everyone who joins the company scheme is pumped into, irrespective of personal situation. I struggle to believe that a 'one size fits all' fund is actually the best for everyone. I would be interested in better growth, at least over next 10 years or so, but obviously not at a going for broke risk.

We have 2 kids, both will be 30's by the time my retirement looms, plenty of life insurance in place, mortgages will be cleared in next 10 years or so. Wife will have a local government final salary pension. As I mentioned, I have one other small pension. We live in a cheap part of the UK with no intention on moving.

[Dr Mike Oxgreen]

The “Lifestyle” option you’re currently in is probably the same sort of thing that most defined-contribution pension schemes default to. It probably invests somewhat conservatively in equity funds (shares) until you’re about five or six years away from your nominated retirement age, at which point it starts automatically switching your investments gradually into less volatile but lower return assets like bonds and cash in order to preserve the value of your investments and reduce the potential for any last minute losses.

It is well worth considering making your own choices, because the current risk profile is likely to be quite conservative and this may not match your personal appetite for risk and your desire for higher returns. Also, the strategy of transferring into bonds and cash assumes an “end point” of your investment at your retirement date, which is appropriate if you were going to purchase an annuity with the whole of your pension, but that might not be what you want to do: you might want to leave your funds invested and draw down an income, in which case your funds will want to stay invested in higher performing assets for a lot longer.

It’s tricky to suggest where you should put your money without knowing a bit more about your appetite for risk, your retirement aspirations, and what funds are available within your scheme. Most pension schemes offer a list of funds that you can pick; you can’t usually choose from the entire range of funds that exist.

That said, we can make some broad-brush suggestions. Since you’ve got 20+ years to go, you can accept a larger amount of “risk”, and this really means using a large percentage of equity funds (shares). Equities give the best returns over a long period of time, but they suffer volatility. Someone recently used the analogy of a mountain climber with a yo-yo... it goes up and down a lot, but over the long term the climber’s yo-yo gets carried up a long way. Unfortunately, he sometimes drops the yo-yo or has to descend into a valley before climbing up the other side, and this is akin to stock market crashes that might happen every decade or so, but again over a long enough period of time the climber still ends up higher eventually.

There are two types of equity fund. Firstly there are actively managed funds, where a fund management team are making active decisions to switch between individual shares within the parameter of their fund. Many people feel more comfortable with this, but the downside is that you pay higher fees for this service, and the truth is that you often don’t get higher returns once the fees are taken into account, compared to the second type of equity fund. The second type are the passive index-tracking funds. These don’t try to make intelligent choices; instead they simply hold a cross-section of shares with the aim of following the value of an index. They periodically buy and sell shares to keep themselves aligned with the index. They typically have much lower fees, and perhaps surprisingly their somewhat dumb approach generally works almost as well as (and sometimes better than) the active funds, and they often out-perform their active cousins when you take fees into account.

Whether you choose active or passive funds is up to you, but you can probably tell I’m in the passive camp. Regardless, there are funds of different flavours in both camps, that specialise in particular areas of the stock market. Some are geographically centred, investing in stocks from the UK, or Europe, or US, or Asia etc etc. Others specialise in particular types of company, like technology, or smaller companies, etc etc. And there are funds that simply hold a wide range of stocks from all over the world and across all types of company - these often have words like “global equities” in their title, and they make a good choice if you’re not sure what you want to invest in.

So in your position, in my opinion (and others may disagree), a decent choice would be to look through the list of available funds and choose one called something like “global equity index”, which would be a passive fund investing across the whole world. Bear in mind that some global funds exclude the UK (it might say something like “ex-UK”), so you’d probably want to supplement that by also choosing a “UK* equity index” or “FTSE all share”.

Many beginners make what I consider to be a mistake and invest far too heavily in UK equities because it feels familiar. But the UK is only about 6% of the world’s stock markets, so arguably you should only invest a very modest proportion of your money at home.

Have a look through the list of funds that you can invest in and let us know what you find, and perhaps we can make more detailed suggestions. You should find a list somewhere on your pension’s web site.

* My iPad keeps wanting to correct UK to “ukulele”. I really wish there were such a fund!

Edited by Dr Mike Oxgreen on Friday 11th May 06:39

[hacksaw]

Dr Mike, thank you very much for taking the time to write out the detailed reply, its exactly the sort of feedback I was looking for.

I'd be happy with taking more risks over the next 5 to 10 years, I've no problem with that, longer term, 50 ish, more secure. Basically I'd like to build a bit more whilst time is still on my side. I'm not a massive earner and I'm not looking for a jet setting retirement, comfortable would be my aim.

Next job will be to look at what funds are available and look to switch.

Thank you again.

[sidicks]

Dr Mike Oxgreen said:

The “Lifestyle” option you’re currently in is probably the same sort of thing that most defined-contribution pension schemes default to. It probably invests somewhat conservatively in equity funds (shares) until you’re about five or six years away from your nominated retirement age, at which point it starts automatically switching your investments gradually into less volatile but lower return assets like bonds and cash in order to preserve the value of your investments and reduce the potential for any last minute losses.

It is well worth considering making your own choices, because the current risk profile is likely to be quite conservative and this may not match your personal appetite for risk and your desire for higher returns. Also, the strategy of transferring into bonds and cash assumes an “end point” of your investment at your retirement date, which is appropriate if you were going to purchase an annuity with the whole of your pension, but that might not be what you want to do: you might want to leave your funds invested and draw down an income, in which case your funds will want to stay invested in higher performing assets for a lot longer.

It’s tricky to suggest where you should put your money without knowing a bit more about your appetite for risk, your retirement aspirations, and what funds are available within your scheme. Most pension schemes offer a list of funds that you can pick; you can’t usually choose from the entire range of funds that exist.

That said, we can make some broad-brush suggestions. Since you’ve got 20+ years to go, you can accept a larger amount of “risk”, and this really means using a large percentage of equity funds (shares). Equities give the best returns over a long period of time, but they suffer volatility. Someone recently used the analogy of a mountain climber with a yo-yo... it goes up and down a lot, but over the long term the climber’s yo-yo gets carried up a long way. Unfortunately, he sometimes drops the yo-yo or has to descend into a valley before climbing up the other side, and this is akin to stock market crashes that might happen every decade or so, but again over a long enough period of time the climber still ends up higher eventually.

There are two types of equity fund. Firstly there are actively managed funds, where a fund management team are making active decisions to switch between individual shares within the parameter of their fund. Many people feel more comfortable with this, but the downside is that you pay higher fees for this service, and the truth is that you often don’t get higher returns once the fees are taken into account, compared to the second type of equity fund. The second type are the passive index-tracking funds. These don’t try to make intelligent choices; instead they simply hold a cross-section of shares with the aim of following the value of an index. They periodically buy and sell shares to keep themselves aligned with the index. They typically have much lower fees, and perhaps surprisingly their somewhat dumb approach generally works almost as well as (and sometimes better than) the active funds, and they often out-perform their active cousins when you take fees into account.

Whether you choose active or passive funds is up to you, but you can probably tell I’m in the passive camp. Regardless, there are funds of different flavours in both camps, that specialise in particular areas of the stock market. Some are geographically centred, investing in stocks from the UK, or Europe, or US, or Asia etc etc. Others specialise in particular types of company, like technology, or smaller companies, etc etc. And there are funds that simply hold a wide range of stocks from all over the world and across all types of company - these often have words like “global equities” in their title, and they make a good choice if you’re not sure what you want to invest in.

So in your position, in my opinion (and others may disagree), a decent choice would be to look through the list of available funds and choose one called something like “global equity index”, which would be a passive fund investing across the whole world. Bear in mind that some global funds exclude the UK (it might say something like “ex-UK”), so you’d probably want to supplement that by also choosing a “UK* equity index” or “FTSE all share”.

Many beginners make what I consider to be a mistake and invest far too heavily in UK equities because it feels familiar. But the UK is only about 6% of the world’s stock markets, so arguably you should only invest a very modest proportion of your money at home.

Have a look through the list of funds that you can invest in and let us know what you find, and perhaps we can make more detailed suggestions. You should find a list somewhere on your pension’s web site.

* My iPad keeps wanting to correct UK to “ukulele”. I really wish there were such a fund!

Edited by Dr Mike Oxgreen on Friday 11th May 06:39

Excellent advice, very little to add to that apart from ‘potentially’to the bit in bold!