Author Topic: Crumbs just done some proper analysis on 16 years of pension performance  (Read 990 times)

never give up

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People who are familiar with my cautious background on here know that I attacked the mortgage for years and now I am free of that I have turned my attention to building my FI total.

I have just had a proper explore of my company pension and found a way of understanding quarterly contributions and closing balances over the years. I've plotted these on a graph (because its fun and I do love a spreadsheet!)

Rather scarily for the first 8 years (started paying in in the early 2000's) there was no growth what-so-ever. 100% of the balance was contributions. For 5 or 6 years there was virtually no growth. Then for 18 months or so it went up a reasonable amount. The 2008/2009 crash then wiped out more than the gains. Thankfully performance since then has been extremely impressive.

Thinking back there were no index funds when I first started investing in it. The fund choice was very limited and I believe charges were all in the 1-2% range. Thankfully index funds came along at some point and I moved into them (long before I found MMM). I'm assuming this would have made a fair bit of difference in the performance stakes.

This raises a few point for me:

1. Scary that a fixed rate cash investment (even 1.2%) would have performed better than my "long term growth" pension for a period as long as 8 years.

2. An average of 7% a year may be fine when looking at 30+ year time horizons but crumbs it may be a rollercoaster along the way.

3. As someone who is trying to build an ISA sum to help get me through the 45 to 55-58 age range (40 now) it is rather concerning that I could experience an 8 year period now like this (or worse!). I've seen sequencing referenced to a lot on the forums and now think I get this :-)

4. Where I was thinking VG LS80 may be good for my ISA investments I now wonder if VG LS 60 or even 40 would be better, while keeping the pension at 80%+ in stocks.

I've only ever really looked at the balance of my pension over the years (perhaps 6 monthly) it is a real eye opener to explore it in more detail. I also feel regret at the level of AVC's I've had over the years. Should have done more here.

Has anyone else ever had this amount of data to digest having barely scratched the surface previously? Anyone had periods of longer than 8 years where their returns were so disappointing?

If anyone is new to the forums and only just getting used to this stuff as I am I would strongly encourage you to check what fees you are paying, where your funds are invested, read and learn about asset allocation etc. It's all good stuff and I should have done more earlier.

poppydog

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #1 on: November 12, 2017, 02:14:04 AM »
So much of what you write resonates with me NGU.  In my case, the first lightbulb moment I experienced was one November afternoon about 6 years ago.  An annual statement from Standard Life landed in my letter box, referring to a dormant DC pension fund from a prior employer.  At the same time a news report on the TV was saying that the FTSE was up about 11% that year to date.

The Standard Life statement told me that the fund had increased by just 1.5% that year.

I realised then that there had to be a better way, and that started me on our FI journey.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #2 on: November 12, 2017, 02:33:37 AM »
Out of curiosity do you know what fund(s) you were invested in during that time?

poppydog

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #3 on: November 12, 2017, 02:37:53 AM »
Hi BTHD - if your question was for me, then all I can recall is that the fund was called "Personal Pension plan" something or other....

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #4 on: November 12, 2017, 04:31:54 AM »
Apologies I actually meant never give up! I should have quoted.

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #5 on: November 12, 2017, 05:15:01 AM »
They were a mixture of global type funds in order to provide a decent geographical spread. They were all actively managed. Considering I started buying when the markets were having a tough time I would have expected to have done better than break even. Those early years were my best long term compounding purchases! Must admit to being a little miffed. Not sure how much is down to fund underperformance versus fees versus market performance here.

To be fair to myself there wasnít much choice at the time and my pension has nearly doubled in the last 4 years. Iím not good enough at maths to work out all the individual unit performance here but I expect annualised performance must now be around an acceptable rate.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #6 on: November 12, 2017, 06:44:32 AM »
I've had a quick look and to be honest the return sounds about right over the dates you've mentioned (granted the period is probably a terrible one to look at).

If you look at the return even on the FTSE All World Index (below) between those two points it becomes virtually flat. So I don't think the active vs passive had that much to do with it - it's just a really bad period for performance.

Glad to hear they're doing much better since though. I guess it just shows how hard you can get hit by things like sequence of returns if you happen to choose a bad date to retire.

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #7 on: November 12, 2017, 08:37:56 AM »
Good use of a graph thanks bthd. Yes I donít think it was a case of huge fund underperformance although perhaps around 2006 it should have been doing better. The fees wouldnít have helped.

It was more of a concern to me that Iím investing funds now that I hope can let me work part time from the age of 45 until I can take my pension. As a result my future is massively impacted by performance over the next 5-10 years. With such strong market performance over the last 6 years I canít say Iím hugely optimistic over this future time period. As a result I need to select my fund choice carefully as what happened to my pension is evidence if anyone needed a clear example that itís a long game.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #8 on: November 12, 2017, 08:49:56 AM »
You're welcome! Definitely, pension funds are notoriously expensive. Even the vanguard options in my company pension have an OCF of over 1% p.a.

Agreed. Due to the nature of pursuing FIRE and how quickly we're aiming for it sequencing risks and the returns over a short period both play a massive part.

You may have seen this before - but Michael Kitces wrote an excellent piece on using a bond tent to mitigate sequencing risks for a retiree: 

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

For that reason I personally wouldn't use the LS funds and use a blend of bond / equity funds instead as I'd prefer to be able to adjust my bond allocation over time (and in the event of a downturn be able to draw specifically from the bond portion).
« Last Edit: November 12, 2017, 08:57:05 AM by Burnthehousedown »

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #9 on: November 12, 2017, 08:57:03 AM »
Thanks so much. I havenít seen that article but Iíll have a good read. Yes I see just in principle how having cash/bonds to use for drawdown in the short term would work well and why the Life Strategy funds are more long term. Something to definitely think about in more detail. Splitting my next 15-18 years up and having different investments for different time periods makes sense.

So glad Iím now putting the work in and not just leaving things hoping theyíll be ok.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #10 on: November 12, 2017, 09:01:01 AM »
You're welcome - let me know what you think!

Splitting my next 15-18 years up and having different investments for different time periods makes sense.

Definitely - it's something I'm putting a lot of thought into myself at the moment trying to work out what ratio I should be funding my pension vs ISA due to the ever increasing age for taking pension benefits.

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #11 on: November 12, 2017, 09:08:07 AM »
Yes we sound very similar here. May I ask you how old you are? I am 40. Itís the FI part of FIRE that means the most to me. Iím happy to work part time until 55 if necessary but would like to get to part time as soon as possible, ideally 45.

At the moment I figure it would be good to get my pension to my ideal FIRE total and to use ISAsís to help supplement part time work I.e. perhaps the part time work can cover my unavoidable basic costs while the ISAís provide money for holidays and hobbies etc. In that cas it wouldnít be an issue if my ISAís ran out at 55-58.

Youíre right it isnít easy figuring out how much to invest where and in what quantities.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #12 on: November 12, 2017, 09:26:21 AM »
I agree with you the FI part of FIRE appeals to me the most, I think it's more about the freedom to do what I want.

I'm only 23 - so in some ways it's even more difficult for me because who knows what will happen to the pension rules by the time I get to the age where drawing on it is possible? And I highly doubt the state pension will be there for me in the future.

As a result I'm heavily funding my ISA and my pension is only being funded with 10% of my salary (but it also has a much longer timescale for growth). To be honest I'm going to try to get to FI using my ISA and my pension will be a later in life bonus almost!

Part time sounds like a great idea - I actually enjoy work, just not having to be there 5 days a week at 8:30am.
« Last Edit: November 12, 2017, 09:31:16 AM by Burnthehousedown »

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #13 on: November 12, 2017, 09:42:53 AM »
Ah yes you definitely have time on your side there. Well done for putting so much thought into this at such a young age. At that age I would be prioritising an ISA over the pension too. Weíre opposite here in terms of which vehicle to hit our FIRE total with. Iím currently looking at the state pension as just a later in life bonus and not factoring it into any calculations.

I would worry I would turn into a hermit if I was fully retired. So yeah part time work is completely appealing. It still give some sort of structure and ability to work in a team but the fact that salary is irrelevant and that I could just leave at any point if I wasnít enjoying it is so appealing. Getting tired of the corporate world and the overlords having such a say over the stress levels and quality of my life.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #14 on: November 12, 2017, 09:51:56 AM »
Ah yes you definitely have time on your side there. Well done for putting so much thought into this at such a young age. At that age I would be prioritising an ISA over the pension too. Weíre opposite here in terms of which vehicle to hit our FIRE total with. Iím currently looking at the state pension as just a later in life bonus and not factoring it into any calculations.

Thank you! I think the flexibility is also an important factor for me. Although it would be much easier to hit my number with a pension due to the tax relief (but that's no good if I can't access it!).

I think not factoring in the state pension is a wise move and it will be a nice added bonus when it kicks in.

I would worry I would turn into a hermit if I was fully retired. So yeah part time work is completely appealing. It still give some sort of structure and ability to work in a team but the fact that salary is irrelevant and that I could just leave at any point if I wasnít enjoying it is so appealing. Getting tired of the corporate world and the overlords having such a say over the stress levels and quality of my life.

Definitely!

If you don't mind me asking, how much longer do you think it will be before you hit FI?

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #15 on: November 12, 2017, 10:00:41 AM »
Iím not close unfortunately. Iíve been quite risk averse so was a mortgage overpayer rather than an investor. This has impacted any chance I have of a very early MMM style retirement. If I had know at your age what I know now I would have done things differently.

However on the plus side I am now mortgage free and so Iím trying to hit the pension and ISAís hard. I need to see where Iím at in 5 years time but would love to be able to go part time at that point.

Burnthehousedown

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #16 on: November 12, 2017, 10:18:09 AM »
Well being mortgage free is definitely something to be happy about!

Good luck - definitely keep us updated with your progress.

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #17 on: November 12, 2017, 10:22:09 AM »
Thank you will do. Iím keeping a journal to track progress and decisions made. Good luck yourself, you seem to have a good plan so Iím sure youíll do well.

poppydog

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #18 on: November 13, 2017, 09:36:17 AM »
When we finished off the mortgage 5 years ago, we simply diverted the same amount into our SIPPs.  Made the stash grow super quick!

skip207

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #19 on: November 21, 2017, 06:47:15 AM »
I started my pension about 15 years ago.

I would say out of the 15 years there have been about 3-4 years of losses.  5-6 years of just breaking even and 5 years of growth of differing levels.

So only about 30% of the time is it making money.  When it does make money it tends to make a lot.  That then spread out over the next 60% period where it does nothing or makes a loss! 

never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #20 on: November 21, 2017, 10:36:01 AM »
We have a lot of overlap there skip207 and I would say mine is very similar. It just goes to show how misleading averages are as they donít properly tell the story of the ups and downs. You have to hope that new people to investing donít sell out after 6 or 7 disappointing years as I could see how people could get disheartened. You really have got to stick with it for the long haul.

The Cardinal

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #21 on: November 24, 2017, 03:38:49 AM »
It looks like we have similar plans and cautious outlook, OP, albeit with me being 3 years or so behind and needing to cater for a family of 4.  I'm 37 and discovered this site earlier this year, which was a bit of a revelation. 

My plan has initially also focused on paying off debt; now down to £18k mortgage and £12k loan.  As posted elsewhere, I have also been contributing to S&S ISAs since 2007 and have NHS pensions that kick-in from age 60 and State Pension Age (? 67-69).  I'm not contributing to a SIPP, but am now watching the funds in my ISAs more closely. 

My plan is to build up a fund equivalent to £460k in today's terms, to give me £30k p/a from age 50-60 and then £20k p/a from 60-68.   

It's unlikely that these market rises will continue and it will be interesting to see what this will mean for my savings, those who have similar plans and those who have "retired" in recent years.  In hindsight, (?) 2010-2017 may have been a great time to FI / RE...


never give up

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #22 on: November 24, 2017, 10:30:59 AM »
Hi The Cardinal. Good luck with your plans. If you have fairly low rates on your mortgage and loan I would be more inclined to invest now and let the debts diminish with their normal payments. I was a bit too cautious and wished I had invested more earlier so I had more funds working for me.

I don't know enough about the drawdown stage (still learning) but I don't know how your 6.5% withdrawal rate would work in the early years if market returns were poor at this point in time?

I too am pessimistic about market returns over the next few years and agree a 2015 FIRE date would have been great. I'll let you know how my inventing a time machine plan goes. (Currently referring to this as FIRE Plan Z!)

The Cardinal

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Re: Crumbs just done some proper analysis on 16 years of pension performance
« Reply #23 on: November 24, 2017, 03:02:45 PM »
I guess a lot of people are drawing down at a "safe withdrawal" rate that keeps their capital intact, whereas I'm happy to slowly burn through the capital sum in the years before my pensions kick-in.   

I should add that I'm seeking to downshift to a lower pressure job rather than retire per se, which I think is what you've mentioned too. 

I'm going to have a think about the point made on investing rather than debt repayment now...