Recent discussions that I have had with business owners have given me the impression that there is a lot of mistrust out there of IFAs and managed pension funds. Whilst admitting that there are always exceptions, what follows below are the results of some enquiries I have recently done into them. I have carried out research.
I have carried out some research into yields of pension funds and charges thereon.
I am not suggesting that you should, or should not, invest into a particular fund. What follows below is for illustration only and should not betaken as constituting financial advice. I would also like to make ti clear that Ido not take, and never have taken, any commission from anybody who I have recommended to you.
The annual charge is normally between 2 and 3.5 per cent for such funds. The annual yield is typically around 7per cent after subtracting the management fees.
If they are being managed properly- and there are professional sanctions which can be brought against those that aren’t – they should be able to switch investments for you at short notice when there are sudden changes to the market, they should consult you concerning investment strategy to fulfil your wishes, and they should warn you of the tax effect of doing something silly.
The yield from pension funds which are not actively managed by financial advisers, i.e. passive funds, is very low- 2 or 3per cent per annum approximately. This is why the yields are so low:
1. There is no defence mechanism against abrupt changes in the markets. Thus, when we had the mad government of Liz Truss, billions of pounds were knocked off the values of passive funds, and the Bank of England had to clear up the mess. In recent years, passive funds have lost money rather than increasing in value.
2. Generally, passive funds are invested in very low-risk investments, and as you get older, they will deliberately decrease the amount of risk (and therefore the yield). You might not want this. fI you are like me, once you have paid off most of or all your debts you might want to take more of a risk with your money to achieve higher returns, because you will be able to bear possible losses more easily.
3. The passive fund won’t let you. fI you ask them to invest in something that you, personally, want to invest in, they will say to you, “We can’t do that. Consult an IFA.” Passive funds will invest according to what the pension provider thinks is good for the whole population of the UK – irrespective of how long it will be before you retire, what your personal ethics are concerning choice of investment, and any other factors relevant to you as an individual.
We will now go on to funds which are actively managed.
The annual charge is normally between 2 and 3.5 per cent for such funds. The annual yield is typically around 7 per cent after subtracting the management fees.
If they are being managed properly and there are professional sanctions which can be brought against those that aren’t – they should be able to switch investments for you at short notice when there are sudden changes to the market, they should consult you concerning investment strategy to fulfil your wishes, and they should warn you of the tax effect of doing something silly.
This is an extreme example, but it happened to a client of mine. I won’t name her for reasons of confidentiality; however, she’s been in business for about the last 50 years. She felt that her pension fund wasn’t doing too well and, without taking any advice, asked the fund to take it all out, so that she could invest the money somewhere else. The fund, which was a passive fund, simply did as she them and did not explain that there would be tax charge for doing. The tax came to over £50,000 basically money down the drain.
As you can see, if you are investing in a passive fund, there may be hidden risks.
In conclusion: It is no skin off my nose whether you use any particular IFA, or don’t use one at all, or what you may decide to do with your money. But I would not be doing my job properly if I do not take pro-active steps to help you increase your wealth, including recommending people to you with specialist knowledge.