Steve asks: “I’m 25 and my employer matches my payments up to 5%. The Pension policy is “Aviva Pensions Mixed Investment (40-85% Shares) S2″. Any tips on how I should be managing this better?”
Q&A 44 – What Are My Pension Options? – Shownotes
Today’s question comes from Steve:
Hi, I’m 25 and I joined the pension scheme at work in April 2014.
My employer matches my payments up to 5% so at the moment I pay 5% of my salary in and my employer pays in 5% of my salary.
I am on a basic £35K + £5K car allowance.
I want to take more of an interest in my pension but I don’t know where to start.
The Pension policy is with Aviva – “Aviva Pensions Mixed Investment (40-85% Shares) S2”.
So any tips on how I should be managing this better? Any good resources you would recommend?
Two in a row. After Matt’s question on Monday regarding how to treat pensions in your net worth calculation, this question is very well timed.
The Power Of Pensions
First of all, good work. Matching your employer match (5% in this case) is a very savvy financial move, especially in your mid-20s.
Even more gold stars for starting to take more of a keen interest in how your investments within your pensions are managed. It’s important to put the money in, but the return you get on your investments is equally, or maybe even more, important.
Here’s a quick example to demonstrate why. Say you put in 5% of your £35k salary per year (£1,750) and your employer matches it with another £1,750. You are 25 now, so we’ll assume that you do that every year until you are 65.
If you can obtain returns of 3.5% per annum on your investments, your final pension pot in today’s money would be £295k. However, if you can obtain 8.5% returns per annum, your final pension pot would be over £1m. Clearly a BIG difference.
What About Your Investment?
You say in your question that 100% of your pension is currently invested in the Aviva Pensions Mixed Investment (40-85% Shares) S2.
A quick bit of research on MorningStar shows that:
“To provide a good return through a mixture of investment income and capital growth. The Fund invests in a wide range of assets to spread and control risk by using any of our other appropriate funds. The fund manager will decide the allocation of investments between different funds.”
My first observation is that this is an actively managed fund, so I immediately have some concerns over fees and potential underperformance against the overall market.
The asset allocation shows that it is invested:
- 72% stocks
- 13% bonds
- 4% property
- 2% cash (16% long cash, 14% short)
- 8% other
The fund is invested 42% in the UK, 19% in the US, 17% in the Eurozone and 10% in Japan.
So, whilst it is fairly well geographically diversified, I would question why as a 25 year old investing for 40 years, you would need 15% invested in cash and bonds.
Also, it is interesting to see that in it’s biggest holdings, it’s top 5 holding are all in other funds. Therefore, it’s likely you are getting hit with double the fees.
Historical Returns And Fees
Moving onto the historical returns, we can see that the 10 year annualised return is 6.34%. However, you need to consider what fees you are paying. You should be able to find this in your annual pension statement. From this, you’ll be able to see if the 6.34% annualised return is before or after fees.
If it’s after fees, this isn’t too bad compared to the performance in the past 10 years of the FTSE All-Share or World Market ETFs. However, I suspect that this 6.34% figure doesn’t include the pension management fees and possibly some other annual charges.
At the end of the day, you are doing pretty much everything right. If you can keep investing in this mix (or maybe something with slightly more equities as a total % of the portfolio), you keep investing at least the employer match (and more if you can afford), you are going to be in an amazing position come retirement.
Keep up the good work Steve!
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