The Telegraph on Saturday, 2nd September had an article “Diary of a private investor” that rang a number of bells with me. As this article is behind the Telegraph’s paywall, in summary, James Bartholomew, a private investor, was asked by a young relative what to opt for as investments in her workplace pension.
He has a hissy fit about the Aviva default option and the funds that are on offer to members of the workplace pensions provided by Aviva. His advice to his relative is to use the ability to not use the default and look at a combination of a mining fund, a value fund, a British smaller companies fund and a Far East fund.
I feel he has a very reasonable criticism of the Aviva website, “not actually aimed at the people who are going to have the pensions”, but rather missed the point of the default fund, which is aimed at the majority of the population, (90% by Aviva’s count), who are not engaged in the pension process but are being carried along by the tide. The default fund is a mix of international blue chip equities, Gilts, corporate bonds and bank deposits, which reflects the old staple of pension funds, the insurance “with profit” fund. These funds were never expected to ride the heights of investment returns, but were designed to act predominantly as a store of value and some protection from inflation.
Like Mr Bartholomew, I am not happy with the default fund and when I am settling up a workplace pension scheme, I will try to tailor the investments to the circumstances and risk appetite of the individual member. Unfortunately, so many people will not engage in the advice process, so even when advice is offered to members free, (paid for by their employer), 50% or more of the members will still be in the default fund.
The actual availability of funds within a workplace pension depends ultimately on the scheme adopted by the employer; Now:Pensions has no choice! NEST, (National Employment Savings Trust), has few choices. Investment choices with the big insurance providers can be in the hundreds, but there is a price to pay for these options. Some funds will cost no more than 0.75% per annum, but specialist funds can be considerably more, double is not uncommon, (1.5%), with some funds being even more than that.
The average UK pension member has little interest in pension advice or investment advice, so the default fund is an example of something designed by a committee: fitting no one’s circumstances properly, but succeeding in keeping the providers out of regulator trouble.
For the future, Mr Bartholomew needs to ensure his young relative understands that the investment choices she makes now with him need to be reviewed at regular intervals as the investment environment is always in flux. His fund choice now suggests to me too much reliance in managed funds and their high costs; looking at index funds could significantly reduce the cost of holdings.
Members of workplace pensions need to understand clearly a few basic truths
Not engaging in the pension process will cost you dearly in 30+ years
The default fund will not be appropriate for you; if you are young, you probably should be taking more risk; if you are older you need to consider annuity or drawdown and invest accordingly.
You will not be paying enough into your pension. 2% now and 8% in a couple of years is nowhere near enough for half pay at age 67. Think around double from age 20 to retirement!
Investments need to be reviewed regularly. At age 20, every year is perhaps too often. At age 50, every 5 years is not enough.
Overall, pensions are the most tax advantaged way of saving for retirement; not taking advantage of that would be foolish in the extreme.
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.