UK pension allocations

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homburg
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Joined: Tue Oct 09, 2018 1:02 pm

UK pension allocations

Post by homburg » Tue Oct 09, 2018 1:16 pm

Hello from a newbie. I've been obsessively reading this forum and the wiki for the last few days - amazingly helpful resource.

I'm currently reviewing all of our financial arrangements, and about to set up a 2- or 3-way investment for my kids. All this has prompted me to look at my pension, too.

I'm 47. I only started my pension in 2008. It is in eight funds (picked by an IFA at the time), broken down like this:
- property (1 fund, 5% total)
- cash (1, 20%)
- bonds (2, 10%)
- equities (4, 65%)
(33% is ethical equities, 5% ethical bonds)

I started out paying about £500 a month; this has gone up to keep pace with inflation, of course, and I now pay £670 a month. In total I have paid in £83,000 and the pot is currently (ie after 10.5 years) worth £111,000. To me this doesn't seem very good - am I right? What sort of growth would *you* hope for with slowly increasing monthly sums like this after a decade?

I've looked at the funds. The best of them (Pacific equities) has grown 8.8% in 10 years (the ethical ones just below that); the worst was cash, at -1.0% over 10 years. The average performance over 10 years (when factoring in my percentage allocations) is 5.9% (for 5 years it's 7.4% - compared to 65% for VWRL, say, which I've seen recommended here a lot).

My pension provider doesn't seem to offer that great a choice anyway - so perhaps I should switch. Anyone recommend a good UK provider which would allow me to use ETFs, say?

Thanks for any advice. (Shoot the IFA?)

Valuethinker
Posts: 35969
Joined: Fri May 11, 2007 11:07 am

Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 3:40 am

homburg wrote:
Tue Oct 09, 2018 1:16 pm
Hello from a newbie. I've been obsessively reading this forum and the wiki for the last few days - amazingly helpful resource.

I'm currently reviewing all of our financial arrangements, and about to set up a 2- or 3-way investment for my kids. All this has prompted me to look at my pension, too.

I'm 47. I only started my pension in 2008. It is in eight funds (picked by an IFA at the time), broken down like this:
- property (1 fund, 5% total)
- cash (1, 20%)
- bonds (2, 10%)
- equities (4, 65%)
(33% is ethical equities, 5% ethical bonds)
Cash is really for emergency expenses (and I recommend at least 6 months of household bills) then carve it out as separate from your portfolio (mentally at least).

I would increase your bonds to 20-30% then. A difficult issue is that UK govt bonds (gilts) pay a little over 1% right now. I have opted to hold Short Term gilts (ETF) which has next to no return, but is relatively stable. The dual concerns of a hard Brexit (which I think could push GBP down another 10-15%) and a new government (If the other party wins again I would expect GBP to fall 10%) plus low gilt yields make fixed income investing for a UK investor.

Overall the rest of your asset allocation looks good, but I would want a global equity index fund for the equities. No reason to overconcentrate in the UK market (home country bias is what they call that in the literature).

You might have to lose the real estate fund to self manage. There are ETFs (I think) which cover the global RE sector (or even just the UK one) and 5% is really neither here nor there in terms of your long run portfolio (rule of thumb: if it's not 10% allocation it won't matter - unless it is a very volatile investment).

I have taken a view that rather than employing ethical funds I will divert cash to groups that I support. A small regular donation to a campaigning group or charity allows the finance people to make better forecasts & plans - and particularly if it is unrestricted cash (i.e. not earmarked for a particular project; charities struggle to cover their basic overheads because of this factor). I have a relation who is an accountant but always worked in charities and that's the inside track.

My issue with ethical funds is that they simply are not able to do much good. If one refuses to hold Exxon, say, because of its stance on the environment, then you have no voice in what it does next. And you have merely lowered the price for some other investor without your scruples (and the price of a stock in the long run is just the expectations of a future dividend stream - some day Apple and Google, even, will start paying back cash to shareholders, as Microsoft and Apple already do).

I am a big fan of activism - owning shares, engaging with management, awkward questions at Annual General Meetings. But AFAIK there are no UK funds that actually do that.

So reducing my diversification in an effort to make myself feel better is greenwash. Better to own the full market, have maximum diversification and to make an actual commitment of real cash to things I believe in.
I started out paying about £500 a month; this has gone up to keep pace with inflation, of course, and I now pay £670 a month. In total I have paid in £83,000 and the pot is currently (ie after 10.5 years) worth £111,000. To me this doesn't seem very good - am I right? What sort of growth would *you* hope for with slowly increasing monthly sums like this after a decade?
I'd have to dig out my formulas but it's the future value of annuity (with growth) paying 500 pcm for 10.5 years. It doesn't look like you made a great of a return given that stock markets soared after March 2009 (plummeted from end of 2007). Also GBP has fallen over that time so your international investments should have done well. The UK stock market has, however, underperformed the US in particular by quite a bit (we don't have the big cap tech stocks which have soared away - Alphabet (Google), Amazon, Apple, Microsoft + Netflix sometimes called the FAANGs + M).
I've looked at the funds. The best of them (Pacific equities) has grown 8.8% in 10 years (the ethical ones just below that); the worst was cash, at -1.0% over 10 years. The average performance over 10 years (when factoring in my percentage allocations) is 5.9% (for 5 years it's 7.4% - compared to 65% for VWRL, say, which I've seen recommended here a lot).

My pension provider doesn't seem to offer that great a choice anyway - so perhaps I should switch. Anyone recommend a good UK provider which would allow me to use ETFs, say?

Thanks for any advice. (Shoot the IFA?)

I haven't done the work on the different online platforms but have a vague feeling that the Halifax ones (is that Insight Investments?) have been good.

Yes you can self manage this using ETFs (I tend to use ishares -- that's partly out of familiarity/ laziness, but also they are the largest (and oldest) ETF provider).

http://monevator.com/compare-uk-cheapes ... e-brokers/

was one review I found. He's a very good blogger.

You need one who can manage SIPPs. Unfortunately Vanguard UK at the moment does not. Otherwise you could do this very easily with Vanguard.

Ted Swippet who posts here is the go to expert on UK personal finance on this forum. He's really done the work. I, lazily, have a company pension (Defined Contribution) and some ISAs.

homburg
Posts: 10
Joined: Tue Oct 09, 2018 1:02 pm

Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 3:48 am

Thank you for this considered and helpful reply. Good points on the cash and property - and in fact I already have a cash ISA and have recently become the owner of a property which will be let out, so those forms of investment are covered big-time anyway across the broader spread of my assets.

I worry about holding UK bonds (including gilts) at the moment, given the uncertainties of Brexit - I'd like to find a global bond index ETF, say (and have found a few options).

On the broker front, I've now discovered www.brokercompare.info, which seems helpful.

That's a great argument you make about the ethical stuff.

Valuethinker
Posts: 35969
Joined: Fri May 11, 2007 11:07 am

Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 4:07 am

homburg wrote:
Wed Oct 10, 2018 3:48 am
Thank you for this considered and helpful reply. Good points on the cash and property - and in fact I already have a cash ISA and have recently become the owner of a property which will be let out, so those forms of investment are covered big-time anyway across the broader spread of my assets.

I worry about holding UK bonds (including gilts) at the moment, given the uncertainties of Brexit - I'd like to find a global bond index ETF, say (and have found a few options).

On the broker front, I've now discovered www.brokercompare.info, which seems helpful.

That's a great argument you make about the ethical stuff.
Found the annuity formula

http://financeformulas.net/Future_Value_of_Annuity.html

Future Value = P [ (1+r)^n - 1]/r

Where P = periodic payment (you could use £6k for starters), r = interest rate, n = years (10.5)

You also know FV.

What you don't know is r. But in Excel you can use goal seek (alt a w g) to work out what value of r gives you that Future Value

Put cursor on FV cell hen alt a w g (in sequence) gives you goal and ask Excel to get the FV you have by changing r.

Or you can just code the formula and play with r until you get a match.

TedSwippet
Posts: 1837
Joined: Mon Jun 04, 2007 4:19 pm

Re: UK pension allocations

Post by TedSwippet » Wed Oct 10, 2018 6:53 am

Welcome.
homburg wrote:
Tue Oct 09, 2018 1:16 pm
I started out paying about £500 a month; this has gone up to keep pace with inflation, of course, and I now pay £670 a month. In total I have paid in £83,000 and the pot is currently (ie after 10.5 years) worth £111,000. To me this doesn't seem very good - am I right? What sort of growth would *you* hope for with slowly increasing monthly sums like this after a decade?
A bit of fiddling about with this calculator suggests an annual return here of around 7%. That's not spectacular, but nor is it dire. It is pretty much around the sort of long-run average one might expect for a 60/40 stock/bond portfolio, even perhaps a little higher where the non-stock portion is heavily cash rather than actual bonds.

What are the charges you are paying here? An IFA might well be taking 1% of your portfolio each year, and that's on top of any fund charges. Over time, that IFA fee can be a considerable drag. Factoring that out, if present, will improve things for you.

homburg wrote:
Tue Oct 09, 2018 1:16 pm
I've looked at the funds. The best of them (Pacific equities) has grown 8.8% in 10 years (the ethical ones just below that); the worst was cash, at -1.0% over 10 years. The average performance over 10 years (when factoring in my percentage allocations) is 5.9% (for 5 years it's 7.4% - compared to 65% for VWRL, say, which I've seen recommended here a lot).
I'm not clear what you are comparing here. 7.4% annualised versus 65% total? If that, then 1.074 ^ 5 equates to a 43% total increase over five years, so in the same ballpark. And this isn't an apples-to-apple comparison either -- VWRL is 100% in stocks, whereas your portfolio (presumably what you are comparing here) is not, so that's a sizeable risk and asset allocation difference between the two.
homburg wrote:
Tue Oct 09, 2018 1:16 pm
My pension provider doesn't seem to offer that great a choice anyway - so perhaps I should switch. Anyone recommend a good UK provider which would allow me to use ETFs, say?
You don't need an extensive choice of funds in your current pension provider, you only need a usable one. One of my pensions only offers around a dozen or so cheap funds, but with just those I can built a fully globally diversified stock/bond mix (they're all BlackRock, so really iShares in disguise), with absolutely no need -- or desire -- to venture outside of that.

If you truly want to switch, any of the usual SIPP providers will let you use ETFs. Hargreaves Lansdown, Halifax Sharedealing, Interactive Investor and Alliance Trust Savings all spring to mind. If you plan to hold OEICs rather than -- or as well as -- ETFs though, you'll want to strike Hargreaves off that list of candidates. They add a 0.45% fee on top of everything else for funds and OEICs. Use one of the broker comparison tools to find out which will be the most cost effective for you given what you plan to hold.

homburg
Posts: 10
Joined: Tue Oct 09, 2018 1:02 pm

Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 7:05 am

Thank you for this - also very helpful! In a way I'm reassured that my current pension AA is 'middling' - that confirms my instinct. (My 7.4% figure - and the 65% one - was based on 5y performance charts, therefore not annualised, I assume, by the way.) I suppose it's one argument for leaving well alone - but there are certainly pension platform charges which are quite high - nice point about having a usable choice.

By the way, I see Vanguard is aiming to launch a UK SIPP later this year.

Valuethinker
Posts: 35969
Joined: Fri May 11, 2007 11:07 am

Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 7:37 am

homburg wrote:
Wed Oct 10, 2018 7:05 am
Thank you for this - also very helpful! In a way I'm reassured that my current pension AA is 'middling' - that confirms my instinct. (My 7.4% figure - and the 65% one - was based on 5y performance charts, therefore not annualised, I assume, by the way.) I suppose it's one argument for leaving well alone - but there are certainly pension platform charges which are quite high - nice point about having a usable choice.

By the way, I see Vanguard is aiming to launch a UK SIPP later this year.
Once Vanguard launches then you can simply switch your investments to them.

I think that at least in principle one can find a platform that is cheaper than Vanguard. However I believe they cap their annual charges?

My take would be the KISS Principle -- Keep It Simple Stupid

If I could do it with Vanguard, and their charges are reasonable, then move it to Vanguard and be done. They offer a relatively limited range of funds and this is a good thing - I am not tempted to "play" with asset allocation or fund choice (which usually means falling for the latest investment fad - tech funds in 2000 etc.).

I will then be confident of the B+ answer. Not the most optimal portfolio for all states of the world, but a good, solid, low cost investment strategy which discourages me from chopping and changing.

Beware the temptation to hold too much cash. I have done that for years and it has really hurt returns. Stock market crashes don't come that often, and when they do, it's almost impossible to nerve yourself to keep buying. It's better to hold bonds, and on average get say 2-3% higher return pa for that part of your portfolio. Compounded over 25 years, that can be a fair chunk of change.

In other words I wouldn't hold more than 10% cash, and that's assuming that that is also your household reserve in case of emergency.

TedSwippet
Posts: 1837
Joined: Mon Jun 04, 2007 4:19 pm

Re: UK pension allocations

Post by TedSwippet » Wed Oct 10, 2018 7:40 am

homburg wrote:
Wed Oct 10, 2018 7:05 am
By the way, I see Vanguard is aiming to launch a UK SIPP later this year.
Indeed. It's been 'just around the corner' now for quite some time. Probably at least a year.

Vanguard's own UK platform is currently... ummm... okay, but not nearly as good as its US offering. The basic value proposition is a 0.15%/year platform fee, capped at £375/year and no trading or transfer out fees. While that handily beats the 0.25%/year to 0.45%/year (and often uncapped, or capped only in the £thousands/year) for ISAs and unwrapped trading accounts at the likes of Hargreaves Lansdown, Youinvest, Bestinvest and so on, it is however no competition at all for iWeb's 0% annual platform fee with a £5/trade charge. It remains to be seen whether Vanguard will add a separate fee for SIPPs, along the lines of those charged by other platforms (including iWeb, in this case).

Personally, I hold plenty of Vanguard funds but hold them on iWeb, Interactive Investor and Alliance Trust. Even for a SIPP, none of these costs me more than the £375/year cap I would pay if held on Vanguard directly (and that's before adding on a possible extra Vanguard annual SIPP fee). It also means I can use the other low-cost tracker fund providers, such as HSBC, Legal and General, and iShares/BlackRock, to cover Vanguard's blind spots. An account on the Vanguard platform can only hold Vanguard funds or ETFs.

So yes, a Vanguard SIPP is a possibility, but unless it comes with an unexpectedly cheap price tag it probably will not beat several of the offerings already available elsewhere, in the same way that it already does not for ISAs and unwrapped trading accounts.

homburg
Posts: 10
Joined: Tue Oct 09, 2018 1:02 pm

Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 7:55 am

Valuethinker wrote:
Wed Oct 10, 2018 7:37 am
I will then be confident of the B+ answer. Not the most optimal portfolio for all states of the world, but a good, solid, low cost investment strategy which discourages me from chopping and changing.
Nicely put. At the moment I'm entertaining this idea:

60% in VWRL
40% in AGBP

and then leaving well alone for a few years until a rebalance might be called for.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 8:46 am

homburg wrote:
Wed Oct 10, 2018 7:55 am
Valuethinker wrote:
Wed Oct 10, 2018 7:37 am
I will then be confident of the B+ answer. Not the most optimal portfolio for all states of the world, but a good, solid, low cost investment strategy which discourages me from chopping and changing.
Nicely put. At the moment I'm entertaining this idea:

60% in VWRL
40% in AGBP

and then leaving well alone for a few years until a rebalance might be called for.
Off the top of my head I don't know what those are but VWRL is global equity index (including Emerging Markets)?

AGBP is currency hedged global credit (corporate and government bonds)?

That would work. I am a great believer in 60 / 40 as a long term strategy for bull and bear markets. Franco Modigliani, the Nobel Prize winning finance professor, said that he kept half his portfolio in stocks so he could enjoy the bull markets, and half in bonds so he would feel safer in the bear markets*.

* He was actually using the TIAA-CREF academic pension plan that was available then. There was a stock fund, and there was the Traditional Annuity fund, which is an insurance-based contract that guarantees a minimum return on each year's contributions (and so functions as a quasi bond fund).

In the 1970s his performance would have been poor - that combination of high inflation (very bad for bonds) and poor equity returns (associated with the erratic economic performance of those years). Treasury Bills (in effect, cash) had the best performance (which as still below inflation).

Over his whole academic career (something like 1956-2006) this strategy would have worked well.

homburg
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Joined: Tue Oct 09, 2018 1:02 pm

Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 8:56 am

Yes, that's right - global equities and global bonds.

Valuethinker
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Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 11:17 am

homburg wrote:
Wed Oct 10, 2018 8:56 am
Yes, that's right - global equities and global bonds.
You really don't need to think too much harder than that.

Move it to a low cost platform and be done with it. Monitor and rebalance once a year, say.

For your SIPP I would be tempted to wait until the Vanguard product is available. And I would probably try to find the equivalent on the current VG offering for ISAs.

homburg
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Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 2:22 pm

Sounds good to me :happy Cheers

homburg
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Re: UK pension allocations

Post by homburg » Wed Oct 10, 2018 2:41 pm

I've also now discovered that I'm paying a breathtaking £1300 a year on management charges. Time for a change!

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: UK pension allocations

Post by Valuethinker » Wed Oct 10, 2018 5:04 pm

homburg wrote:
Wed Oct 10, 2018 2:41 pm
I've also now discovered that I'm paying a breathtaking £1300 a year on management charges. Time for a change!
Yes but you might save yourself a bit of grief if you move it over to Vanguard. That might then be the only move you have to make.

I realize you'd have to wait for a SIPP product from them.

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