The importance of investment performance in your pension. Even as independent pension advisers we can see that, as a contender for your attention today, this could seem to lack the excitement of other options.
And yet the difference that this vital gear in your pension arrangements will make to the amount of money you will have to enjoy in retirement means that while it may not seem terribly exciting, it is extremely important.
What kind of investments make up your pension?
When you hold a personal pension your capital is invested across a mix of carefully managed funds. Each fund uses equities, gilts, bonds or other financial instruments to achieve a return in line with its declared aims and risk profile.
There are a range of fund sectors, including UK Smaller Companies, UK Index Linked gilts, Flexible Investment, Europe Excluding the UK, UK All Companies, UK Direct Property, Asia Pacific etc.
Collectively, the funds in each sector, will achieve a rate of return that reflects the way their portion of the economy performs.
Some sectors will deliver a higher, and others a lower return over a given period. As an example, over a ten year period beginning in 2005, a tracked basket of 40 funds invested in UK Smaller Companies delivered an averaged return of 150.1%, while a similar (and slightly larger) basket invested in UK Direct Property (during the period which included the 2008 crash) averaged just 35.1%.
Within each sector, however, the individual funds may vary markedly in the return they deliver. In the UK Smaller Companies example, above, the best performing 25% of funds delivered an averaged annualised return of approximately 12.5%, while the weakest performing 25% delivered an averaged annualised return of just 5.9%.
So why does your rate of return matter so much?
Like almost everything in investment, how much you end up with in your pension pot when it’s time to retire depends on three things: how much you start off with (or add in as you go along), how long you have the money there working for you, and what rate of interest it grows at.
The decisive influence, of course, is compound interest; the mathematical magic that means that even small differences in annual rate of return ‘compound’ – or multiply up – over time to make a huge difference to your eventual pot size.
3% Growth pa v 6% Growth pa.
As an example, let’s imagine Will and Sarah, two investors who each have £50,000 in their pension at the age of 40. For the sake of the illustration, let’s say neither adds any additional capital to this sum in the years ahead.
Now let’s say Will’s pension manager grows his fund overall at an annual rate of 3%. And let’s imagine Sarah’s grows her fund at 6%. (Neither of those figures is exceptionally high, nor exceptionally low.)
Ten years on, by the age of 50, Will’s pot will be worth £67,195. Sarah’s, however, would be worth £89,541. His has grown by 34% in a decade, while hers has grown by a mouth-watering 79%.
Now fast-forward to their 70th birthdays, by which time each of their pension pots has been bubbling away for 30 years.
Sarah’s £50k investment, which has been growing at 6% pa, is now worth £287,174. That’s a total growth of 574% over three decades.
But Will’s £50k, which was growing at only 3% pa, is now worth just £121,363, a total growth of 242% over the same time period.
Crucially, having started out with exactly the same £50,000 invested, she has almost £166,000 more than he does to enjoy in her retirement.
Doing her best to ensure, when she was 40, that her pension was going to return 6% pa and not 3% pa, has turned out in hindsight to have been a very wise use of a few hours of her time.
How do you make sure you’re a Sarah and not a Will?
As pension investment advisers, it’s down to us to ensure your pension funds (both the sum you bring in when you join us, and the further contributions you make down the years), are invested as effectively as possible.
Our Investment Managers choose the fund providers we use, and the specific funds from those providers, to balance risk with ensuring the best possible returns.
Not all pension advisers are equal in this regard, however.
Choosing providers, and funds within their portfolios, is an ongoing process of analysis, market scrutiny and relationship building in which we at PWS are heavily invested.
Private pensions, and the increased control they give you.
Since UK government changes in April 2015, if you have a private or personal style pension plan, when you retire you are free to draw from your pot without any restriction, at whatever rate you wish.
“This gives you total control over what you then do moving forwards”, says our Chief investments Officer, Peter Randall. “If you retire at 67, you may well be looking forward to 20 plus years in which you will require income, with the level you need changing in line with your zest for life, care needs and other variables.”
It will be down to you to choose what, if anything, to withdraw as a lump sum; how much annual income you want to draw down; and how to invest whatever portion of the pot you decide on to continue growing your capital through your seventies and eighties, in order to perpetuate its ability to deliver the income you require throughout your life.
But whatever decisions you take, using this freedom effectively to deliver a comfortable and secure retirement depends on you having achieved maximum growth within your pension pot up to retirement. And that, as we’ve seen, depends on the investment performance you’ve achieved.
How we achieve strong investment performance at PWS.
Because of the impact that investment return, especially earlier on in your pension building lifetime, has on the eventual value of your pot, PWS is extremely diligent in choosing the providers and specific funds we use.
At the current time, two providers in particular, Marlborough International and Quilter Cheviot, impress us as being able to deliver strong returns, and so now feature strongly in our planning.
Why we choose Marlborough International.
Marlborough is an award winning discretionary fund management group. Its funds are run by highly respected managers with the flexibility and authority to employ their proven flair free of any ‘house view’ constraints. The result is investment teams which act with agility and independence of mind.
They have consistently outperformed their benchmarks, providing great returns while remaining within the risk tolerance levels that we look for.
We use both Marlborough’s Cautious and Balanced funds. Their Cautious fund achieved an investment growth of 73.40% over the 5 years to May 2017 (against a sector average of 39.70%), while the Balanced fund achieved 90.60% over the same period (against a sector average of 52.40%).
What we like about Quilter Cheviot.
Our other preferred provider, Quilter Cheviot, has won more than 20 awards over the last two years, and has gained 5* ratings for its Discretionary and Managed Portfolio Services from Defaqto, every year for the past six years.
QC’s Balanced Asset fund achieved an investment growth of 40.82% over the 5 years to March 2017 (against a sector average calculated by ARC Asset Risk Consultants of 33.80%), while their Growth fund achieved 49.20% (against a sector average of 43.90%).
Talk to us about investment performance and your pension
In both cases, these excellent fund managers give us low risk, actively managed outperformance at a reasonable cost. Precisely the kind of profile we need to achieve the investment return that your pension pot needs to secure its long term value.
If you’re already a PWS pension client and you’d like to discuss your investment performance to date, call or email your Adviser who will be happy to discuss it with you.
If you’re not currently our client, but can see the importance of securing strong investment performance and would like to talk to us about your pension, why not get in touch?