21 February 2012

Why your Pension has Not Done Well... and what to do about it

I regularly get people saying to me “My pension is rubbish - it hasn’t grown in years. I wouldn’t use Company X again” - etc., etc..

So why is that, and what can you do about it? There are two main factors which affect the value of your money purchase pension plan:
  • Investment performance, and
  • Charges
A lot could be said about charges, but the longer you have held a pension plan the higher and less clear they are likely to be! The pension provider may even still be paying an annual sum to the original adviser who set it up for you all those years ago, even though you never heard from him again - most likely at your expense. While some level of charges is necessary to pay for someone to manage your investment, communicate valuations to you each year, and so on, the level may or may not be “reasonable” by today’s standards.
 
Although the charges act as an ongoing drag on the performance of your pension, where it is invested is likely to have a bigger impact. Most people are not investment experts and if given a choice of funds will (apparently) choose the ones they like the sound of near the top of the list - those beginning with “A” get picked the most! Alternatively, a pension provider might offer a smaller range of “managed” funds. The provider’s expertise is on the line here, but that doesn’t mean much if the investors don’t recognise good or bad performance.
 
On top of that there is the underlying performance of investment markets. Over the last 12 years, the average equity return (UK shares) will have lost you money, although bonds (fixed interest investments) have fared better.
 
So what can you do? Well first of all you need information. What are the charges? Where are you invested? And what alternatives are available? In most cases you can switch investment funds fairly easily within the plan. If you can’t get those answers - either by looking at your documentation or by phoning the company  - then you should consider transferring your pension plan elsewhere. That is not a difficult process, and might even give you a chance to consolidate with other pension plans.
 
Then you can see what the charges are going to be, and you can choose investments which match your outlook and the time you have before retirement. There really is no substitute for knowledge here. Generic funds like “managed” funds or trackers or “lifestyle” funds have some value, but may end up performing only as well as the market average (reduced by charges, of course). So you are very likely to be better off eventually if you apply some more expertise and use an adviser to select investments for you based on your situation and outlook.
 
Pension performance can be great! So don’t be hampered by old-fashioned charges and limited investment options.

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