Key Post "Should I just save money or contribute to a pension?"

[DerKaiser]

My distrust of pensions is that 90% are eaten up by bad investment decisions combined with high hidden fees, charges and commissions. Particularly where one is 'advised' by a broker whose only interest is their commisison and not the well being of your pension.

Unfortunately the figures needed to (dis)prove this are not readily available info as far as I know.

I'm not sure how to form a view, but may be the best way is to dig up some related market stats:

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Irish group managed funds posted returns of 4.9 per cent a year on average over the past 10 years, compared with an inflation rate of 1.8 per cent over the same period.

The 4.9% includes only a basic fund charge (often 0.4%), and it would not be a stretch to assume a further 1% could typically be eaten up by product charges (I've referrred to typical reductions in yield earlier in this thread), but that still leaves the typical fund in good shape.

The 20 year return is closer to 8%.

My conclusion would be that the average fund is obviously well above water right now, and anyone maturing their pension who had been investing regularly for 10yrs+ will most likely have done well.

There are a couple of further points:
1) There is a gap between different providers, someone invested with Standard Life is more likely to have done well than someone invested with Aviva
2) If you invested unusually large amounts at bad times (e.g. 5 years ago) you will not have done as well
3) The picture was not as rosy 18 months ago when 10 year returns were barely positive

To be honest Bronte, I strongly believe that you have based your opinion without accounting for the fact that customers who have made good returns don't run to Joe Duffy e.g. how many 90 year olds who have been missold equity products will actually take a case if their fund has done well?

 

[Bronte]

http://www.askaboutmoney.com/showthread.php?t=176024

Two more people with different company defined benefiit schemes whose income in retirement is going to be decimated.

 

[Bronte]

So basically, if the funds that my pension is placed with had a couple of bad years towards the end of that 9 year period, this is probably the cause for what looks like poor performance (on the basis that there was a lesser sum invested overall in the earlier years)?

.

Also it's my understanding of pensions that if you come to retirement when you're 'forced' to pick an annuity, if it's a bad year you can really lose out. Maybe this has changed, one of the experts on here can clarify.

 

[LDFerguson]

Also it's my understanding of pensions that if you come to retirement when you're 'forced' to pick an annuity, if it's a bad year you can really lose out. Maybe this has changed, one of the experts on here can clarify.

All membes in DC schemes now have the option at retirement to choose an Approved (Minimum) Retirement Fund instead of an annuity, or a combination of both annuity and ARF.

 

[Bronte]

Irish group managed funds posted returns of 4.9 per cent a year on average over the past 10 years, compared with an inflation rate of 1.8 per cent over the same period.

The 4.9% includes only a basic fund charge (often 0.4%), and it would not be a stretch to assume a further 1% could typically be eaten up by product charges

The 20 year return is closer to 8%.

As you know I find this whole thing confusing. Are you saying with those figures that if you invest you get a return of 4.9% put you need to subtract a fund charge of .4% and probably (why is is only probably why don't we know why do you assume) 1%. So are we taking 1.4 off the 4.9 leaving a return of 3.5.

And is inflation of 1.8 % also to be deducted?

 

[Bronte]

All membes in DC schemes now have the option at retirement to choose an Approved (Minimum) Retirement Fund instead of an annuity, or a combination of both annuity and ARF.

Definined comtributions are relatively new to me, my OH's company moved to them about 5 years ago and there was a great spin on how brillant they were. I advised my OH to stick with the DB (which is not available to new entrants)

How does the Approved minimum retirement fund work? And the other options annuity + ARF (? Annual retirement fund)

An annuity I understand is that you take your pension pot to any pension provider and ask how much annually they will pay you out of the rest of your life. On your death in general you lose the 'capital' as you've basically 'sold' it to buy the annuity (I know there are other options such as survivors and orphens pensions etc)

 

[ashambles]

Irish group managed funds posted returns of 4.9 per cent a year on average over the past 10 years, compared with an inflation rate of 1.8 per cent over the same period.

I’ve an issue with describing a 10 year rise in fund unit prices of 49% as being a rise of 4.9% a year. A 4.9% increase per year in compound interest terms would be a rise of around 60% .

(Maybe Irish house price have risen 10% since 2003 (I don’t know the exact figures), i.e. from 200k to 220k. Does that mean house prices rose 1% per annum? So nobody who bought is in negative equity? The 10 year figure clearly glosses over roller coaster graphs, which for Irish housing would be more like +10% +10%+10%+10% -20% -20% etc.. )

You’re normally buying funds throughout a 10 year period not just at the start, so it’s the 120 monthly prices that matter not the start price. For instance it’s likely that in most funds the period 2006-2008 was higher than the current price, so any money put away at that point is below its purchase price.

From a quick look at one of the most popular funds - the Irish life consensus fund - it seems that the average purchase price over than 10 years was about 20% higher than it was at the start, so the increase on those funds is 20% despite the 10 year figure being around 40%.

Just to give an example of how volatile that 10 year figure is, the January numbers from 2008 on has been (from that handy rubicon site linked above)

2008 5.1% - hurray
2009 -0.4% - boo - hiss
2010 0.5% - boo
2011 0.9% - boo
2012 1.8% - meh
2013 4.9% - hurray

For 2014,15,16 it’s likely to be substantially less than 4.9% since the start date of those 10 year period corresponds with a 60% ramping up in unit prices to 2007.

 

[DerKaiser]

http://www.askaboutmoney.com/showthread.php?t=176024

Two more people with different company defined benefiit schemes whose income in retirement is going to be decimated.

There are loads of DB schemes in trouble but repeated references to that fact are off topic as this thread is supposed to be a discussion on whether to contribute to a pension on a DC basis or save through other means.

 

[DerKaiser]

As you know I find this whole thing confusing. Are you saying with those figures that if you invest you get a return of 4.9% put you need to subtract a fund charge of .4% and probably (why is is only probably why don't we know why do you assume) 1%. So are we taking 1.4 off the 4.9 leaving a return of 3.5.

And is inflation of 1.8 % also to be deducted?

I'm saying the 4.9% figure probably only allows for a nominal charge of about 0.4% and with typical reduction in yields of more like 1.4%, 3.9% would be the average return net of all charges to a typical policyholder over 10 years.

Inflation of 1.8% is simply a reference - returns should ideally beat inflation.

 

[DerKaiser]

I’ve an issue with describing a 10 year rise in fund unit prices of 49% as being a rise of 4.9% a year. A 4.9% increase per year in compound interest terms would be a rise of around 60%

The 4.9% p.a. is compound and does represent cumulative return of 60% if you were in from the start of that 10 year period (a 49% rise in unit prices over 10 years is not mentioned anywhere - where are you getting it from?)

You make a good point that whilst 4.9% would be the return on money invested at the start of the period, the volatility of return means that someone contributing a regular amount might have fared differently. in order to address this, I looked at a case where someone made an equal contribution at the start of each year for the 10 years in question. The money weighted return in this case was 3.8% p.a. The reduced yield reflects the fact that most of the growth was in the first 5 year period.

 

[orka]

How are the charges typically built into the pension? If there is a 1% management fee quoted, is that built into the fund price? Or is 1% of the fund deducted at each year end?
Even if there is 100% allocation, does the bid/offer spread effectively remove 5% of the contribution anyway?

 

[DerKaiser]

How are the charges typically built into the pension? If there is a 1% management fee quoted, is that built into the fund price? Or is 1% of the fund deducted at each year end?
Even if there is 100% allocation, does the bid/offer spread effectively remove 5% of the contribution anyway?

The fund price will typically take a very basic percentage of fund charge e.g. 0.4%. If the AMC if 1%, then a further 0.6% is taken by unit deduction. These charges will typically be taken daily or monthly.

Finally if there is a bid offer spread, it will be reflected in the price you pay for the units on purchase versus the price you get on encashment.

Where 100% allocation is mentioned, this means that there is either
1) no bid offer spread, or
2) there is a one and your allocation is increased to offset the effect of it

 

[Bronte]

When or if someone has the time or inclination could they show how someone contributing 5% of salary combined with 5% paid by employer over say the last 40 years works out as an actual pension. Showing for each month or year how much is taken in costs/fees/charges/commission and any other hidden things.

Until one knows that one cannot decide whether to save monehy or contribute to a pension is worthwhile.

 

[LDFerguson]

Definined comtributions are relatively new to me, my OH's company moved to them about 5 years ago and there was a great spin on how brillant they were. I advised my OH to stick with the DB (which is not available to new entrants)

How does the Approved minimum retirement fund work? And the other options annuity + ARF (? Annual retirement fund)

An annuity I understand is that you take your pension pot to any pension provider and ask how much annually they will pay you out of the rest of your life. On your death in general you lose the 'capital' as you've basically 'sold' it to buy the annuity (I know there are other options such as survivors and orphens pensions etc)

There's a pretty good description of an ARF on the NCA website here.

You can only have an ARF if you have guaranteed lifetime income of €18,000 per year from other sources, including the State Pension. So at retirement, if you have, say €12,000 per year from the State, you can use some of your fund to buy an annuity that will give you the other €6,000 per year and put the balance into an ARF.

Alternatively you can pu the first €120,000 of your fund into an Approved Minimum Retirement Fund (AMRF) - similar to an ARF but you cannot access funds in an AMRF (other than the growth) until you (a) have €18,000 per year guaranteed lifetime income from other sources, (b) use it to buy an annuity later, or (c) reach age 75 at which point an AMRF becomes an ARF.

 

[LDFerguson]

Even if there is 100% allocation, does the bid/offer spread effectively remove 5% of the contribution anyway?

The bid/offer spread is gradually disappearing - more and more new pension contracts don't have a bid/offer spread at all, a trend I'm happy to see.

 

[ashambles]

The 4.9% p.a. is compound and does represent cumulative return of 60% if you were in from the start of that 10 year period (a 49% rise in unit prices over 10 years is not mentioned anywhere - where are you getting it from?)

You make a good point that whilst 4.9% would be the return on money invested at the start of the period, the volatility of return means that someone contributing a regular amount might have fared differently. in order to address this, I looked at a case where someone made an equal contribution at the start of each year for the 10 years in question. The money weighted return in this case was 3.8% p.a. The reduced yield reflects the fact that most of the growth was in the first 5 year period.

Having a closer look at the numbers it does seem it is an annualized rate and includes compounding, however the reason I though it wasn’t is because they talk about averages as below - which isn't the same as an annualized figure to me at least. Ideally I’d like to see the unit prices of the funds, so there’d be no room for confusion.


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The average managed fund return has been a healthy 7.1% per annum over the past three years. Half of the five year returns are
negative however, with an average return of -0.5% per annum over this period. Irish group pension managed fund returns over the
past ten years have been 4.9% per annum on average, compared with the Irish inflation rate of 1.8% per annum over the same time
horizon. All of the managed funds surveyed outperformed inflation over this period.

 

[DerKaiser]

Having a closer look at the numbers it does seem it is an annualized rate and includes compounding, however the reason I though it wasn’t is because they talk about averages as below - which isn't the same as an annualized figure to me at least. Ideally I’d like to see the unit prices of the funds, so there’d be no room for confusion.


[broken link removed]

The averaging referred is across the 10 fund managers, the rates for each individual manager are definitely compound per annum rates.

 

[DerKaiser]

When or if someone has the time or inclination could they show how someone contributing 5% of salary combined with 5% paid by employer over say the last 40 years works out as an actual pension. Showing for each month or year how much is taken in costs/fees/charges/commission and any other hidden things.

Until one knows that one cannot decide whether to save monehy or contribute to a pension is worthwhile.

If you take out a DC pension, it's the law that the provider provides you with an illustrative table of benefits and charges and an illustrative table of commissions which cover exactly what you have described above.

 

[Firefly]

Even now, you can walk into a pension provider and get a guaranteed return (net of charges) over 5 years in excess of 3% p.a. - This actually exceeds the best 5 year rate in best buys!

Hi DerKaiser,

Are these just for lumpsum deposits though rather than for someone who wants to put X euro into a pension on a monthly basis?

Firefly.

 

[ronaldo]

I'm extremely happy with the performance of my pension.

I started contributing in January 2006 - so just over 7 years. My pension is valued at 33.25% more than my total contributions.

My first couple of years contributions, which happened to be during a time of high market values, were relatively low and I ramped the contributions up significantly in 2008.

I agree with previous posters though - performance means a lot less in the earlier years as contributions mask and poor performance. It's only now that my contributions are starting to be overwhelmed by increases or decreases in performance on a monthly basis.

It's for this reason that, when people ask me about what they should invest in their pension, I advise them not to waste months and years fretting over performance before investing. Instead, just get into the market ASAP, even through the default option in the pension plan. There's plenty of time later, when you have a fund built up, to worry more about performance.