Monday, 4 October 2010

Pensions 'cost 80p per £1 invested' | News

The Evening Standard today wrote the following article suggesting that HSBC charged almost 80p in every £1 invested on a pension over 40 years.

In my opinion this is another example of the media looking too narrowly at a subject and selecting the areas of interest that carry the most startling headlines.

While they do comment that HSBC pointed out the pension would be worth almost £400,000 at the end its the headline that grabs one's attention. Looking at pension fund charges retrospectively (once it's £400,000), of course the fees are much larger than when there is very little in the pension but those fees are as a consequence of the growth of the fund. If the fund had not grown as well the fees would have been much less.

I have not ran comparative quotes but as the fees we are looking at are done on a percentage lets look at some alternatives.

Assumptions - A fund of £375,000 accumulated over 40 years accumulated at a contribution rate of £200 per month accrues fees of £100,000... (As a note, £2,400 per annum (£200*12) over 40 years is actually £96,000 so I assume there was some sort of inflation proofing escalation added to the contribution).

If the contribution rate and percentage costs remain the same then if performance over that period was halved the total cost would also be halved which would mean the following:

Contributions over 40 years = £120,000 (assuming escalation at the same rate)

Total fund value = £187,500 (due to lower overall growth)

Total Fees = £50,000 (because the percentage charge is less on a smaller fund)

Based on this outcome it is far better to have a smaller and less well performing pension fund... Does that make sense??? NO

If performance had gone the other way, stratospheric, then guess what, the fees would have been even higher, possibly more than the contributions themselves... Shock horror

How you look at this comes down to your overall attitude, it's as crude as are you a glass half full / glass half empty type of person. If you focus purely on the cost of the pension you would be better off with worse investment return, which of course would make you unhappy. If you have paid higher fees as a result of much higher growth and an overall bigger fund then that is something I like to call - a nice problem to have.

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Writing an article in a certain way obviously paints a certain picture and can often scare investors unnecessarily who on the whole do not have a broad enough understanding of the subject matter to understand the limitations of the article.

In the past it has often been suggested that financial advisers are more interested in earning commission than giving their clients good advice. Is it not also the case that news papers are most interested in selling more newspapers and therefore writing articles with sensational headlines is far better than writing a more measured and equally considered piece?

As with all these matters, speak to your adviser, that's what you're paying them for...

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