Why have pensions underperformed? Here are the key reasons. Some are related to the growth (or lack of growth) in the fund whilst you contribute. Others are related to the annuity you can buy when you retire.
Issues related to the fund
Charges – on a recent Panorama programme, a number of investment companies offering pension provision were asked about total charges over the lifetime of a pension. This included up-front fees, annual fees and exit fees. Many companies took more than 40% of your entire contributions as charges; and one bank admitted that they took more than 80% of your pension contributions in charges.
Low interest rates – some of your pension pot is usually held in ‘gilts’ and other interest related deposits. With interest rates at rock bottom, the investment return on such instruments is terrible.
Poor investment performance – most of your pension will be invested in stocks and shares. From 2000 to 2012 the returns from shares has averaged -14% over the entire 12 year period! (Barclays Capital calculation). Far from increasing your investment, it has decreased.
As if these problems are not enough, consider the challenges when you want to take your annuity. Extended life expectancy – as we live longer, the years that your pension has to be paid increases, so the amount that you receive annually decreases.
Low interest rates – the company providing your annuity can’t invest for a high return. Poor investment performance – again, poor returns decrease the amount that can be paid to you. If you add all these points together, the ultimate result is that pension returns have fallen 30% in the last 10 years; and are expected to continue to fall.
Enter the SIPP
A SIPP (self-invested personal pension) is the Government’s way of widening the type of investments which can be made and giving individuals more control over how their pension is invested. SIPPs are regulated by the FSA and the rules are quite complicated, therefore you should see your IFA for full details.
The most important piece of learning is that just because an investment is FSA approved for a SIPP, it does NOT guarantee it as a ‘good’ investment! Due diligence on the part of the investor is still required. On the positive side, the much wider range of qualifying SIPP investments means that the careful investor can almost certainly do far better than the appalling performance of most traditional pension providers. However, a reminder that if you are in a final salary scheme it will mostly be wrong for you to exit. Please take advice from your property agent regarding your individual circumstances.