Financial Planning Myths – Pensions are Rubbish

When speaking with new clients for the first time, I sometimes hear them say something like ‘Pensions are rubbish’ or similar. This can be an indication as to what level of knowledge that particular client may have with regards to ‘What a pension is’. It can also be an indication of their attitude towards pensions.

Typically they are referring to their money purchase pensions, where contributions are invested into one or more investment funds. These funds will fall and rise in line with investment market conditions and the returns paid from the underlying holdings held within investment funds.

Their response can often be for one or more reasons:

• They have invested and not seen a return or even lost money, typically looking at their plan’s performance over the short term.
• They have invested a small amount of money and then realise that they are not going to have the income they were expecting at retirement.
• They are unrealistic about the level of investment returns that their pension fund has the potential to provide.
• They have invested without diversity, often relying on one fund manager or sector (e.g. property) to deliver returns. No one sector or fund manager is always going to be the best performing all of the time.
• They have invested over a short period of time.
• They have not been able to access their pension fund in its entirety.
• They have seen one of their other investments (e.g. an ISA) perform better than their pension fund.
• They know of someone who has had one or more of the above happen to them.

So what are pensions?

Well, they are nothing more than a tax efficient ‘container’ for your investment funds. Poor investment performance has nothing to do with the pension ‘container’ and everything to do with the investment funds that your contributions are invested into.

You wouldn’t complain that a glass of wine tasted badly because of the shape of the bottle that the wine came in would you?

So, often when working with clients, we turn our attention to the following things:

• What investment funds is their money invested into?
• How well are the investment funds run? Who manages them?
• How well diversified are their investments?
• How does the combination of investment funds meet their attitude to investment returns / risk and their expectation of future returns?
• What are the costs for the pension ‘container’?
• What are the costs for the individual funds run by the fund managers?
• What access will they need from their fund and when?

Typically with today’s open investment architecture you could hold the same investment fund within many different ‘containers’, such as an ISA, a pension, an investment or insurance bond or collective investments such as unit trusts.

Of course, pensions have a big advantage over many other types of ‘container’ in that contributions can benefit from tax relief of up to 50%, meaning that extra contributions are paid by the Government on top of any other contributions that are made. There are limits to the level of tax relief, however, this acts as an incentive to save and can give a significant boost to the investment fund.

What else do I need to know?

Over the long-term (10 or more years) a key element is the quality of the fund management.

Poor fund management will in time deliver poor results. Good fund management has the potential to deliver good results.

Using our robust investment process, we can identify those fund managers that deliver good quality fund management within their fund. This will take account of their track record but also how returns are sought by the fund manager i.e. the process involved.

We identify Fund Managers that:

• Stick to what they say they are going to do – i.e. the remit of their fund.
• Within equity based funds, they identify companies that have strong balance sheets with well-contained liabilities, good managers and a proposition that works with a clear desire for the company’s services.

The importance of reviewing your portfolio

You wouldn’t go to the Gym once to remain fit for life would you? Everyone who is interested in maintaining a healthy lifestyle knows that they must make a regular effort to do so. So, if you want to maintain a healthy investment portfolio, you need to regularly review it to ensure that it is on course help you meet your goals and objectives.

A regular review of your portfolio with Loughtons can take into account many factors and ensure that your portfolio is optimised. Fund managers may leave, the market, economic and political environment will certainly change and your original objectives may alter. Different asset classes (cash, property, equities and fixed interest securities) will rise and fall within your portfolio at different rates, requiring them to be re-balanced to your attitude to investment returns / risk.

So the next time you hear someone bemoaning their pension scheme it could just be that they don’t understand what they really have and you may suggest they take a closer look at the fund managers they are using, in conjunction with an Independent Financial Adviser.

For impartial advice on your own personal circumstances please contact us on 01626 833225 to make an appointment.

Please note that the above article does not constitute financial advice.