Pension Q and A - How Do I Know If My Pension Is Achieving a Good Return?
Question:
Over 14 years I have invested £84,000 (£500pm gross) in to my Pension. The value is now £122,200 which seems poor.CSSLP How can I assess whether this investment is providing a good rate of return?
Answer:
To turn £500pm over 14 years in to £122,000 you have achieved a return of 5.20%pa. However, your contributions would have benefited from Income Tax Relief which reduces your actual payment. Currently this would be at Basic Rate, 20% or Higher Rate, 40% (different tax rates would have applied over some of the 14 years).
At 20%, your net payment would have been £400pm giving a return of 8.18%pa. At 40% your net payment would have been £300pm increasing the return to 11.91%pa. Part of the return is investment based, i.e. growth in the fund that you invest in; part is due to tax relief. It is the latter which makes pensions attractive and in my opinion do provide a good rate of return.
Overall, the returns, even at 5.20%pa, seem reasonable. Yes, it could have been better, but equallyCAP it could have been worse. This will be down to two factors; charges and the performance of the fund you invest in. It is easy to start a pension and think that retirement is now sorted out and can be forgotten, but they need to be reviewed.
For starters, are you still in the right pension? The last 14 years has seen major changes to pensions with charges being just one. A modern pension will usually have lower charges than one started 14 years ago.
Or have you considered whether you are in the right fund? How is it performing? It may have been good 14 years ago, is it now? Also, is it appropriate for your Risk Profile, which will have presumably changed over time.
What income can you expect and do contributions need to be increased? Most people understandably base pension contributions on budget rather than targeting a specific income need, but at what point do you want to find out how much pension you can expect. The closer you leave it to retirement the less time you have to do something about it and it may then be too late.
PleaseISSMP note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
Over 14 years I have invested £84,000 (£500pm gross) in to my Pension. The value is now £122,200 which seems poor.CSSLP How can I assess whether this investment is providing a good rate of return?
Answer:
To turn £500pm over 14 years in to £122,000 you have achieved a return of 5.20%pa. However, your contributions would have benefited from Income Tax Relief which reduces your actual payment. Currently this would be at Basic Rate, 20% or Higher Rate, 40% (different tax rates would have applied over some of the 14 years).
At 20%, your net payment would have been £400pm giving a return of 8.18%pa. At 40% your net payment would have been £300pm increasing the return to 11.91%pa. Part of the return is investment based, i.e. growth in the fund that you invest in; part is due to tax relief. It is the latter which makes pensions attractive and in my opinion do provide a good rate of return.
Overall, the returns, even at 5.20%pa, seem reasonable. Yes, it could have been better, but equallyCAP it could have been worse. This will be down to two factors; charges and the performance of the fund you invest in. It is easy to start a pension and think that retirement is now sorted out and can be forgotten, but they need to be reviewed.
For starters, are you still in the right pension? The last 14 years has seen major changes to pensions with charges being just one. A modern pension will usually have lower charges than one started 14 years ago.
Or have you considered whether you are in the right fund? How is it performing? It may have been good 14 years ago, is it now? Also, is it appropriate for your Risk Profile, which will have presumably changed over time.
What income can you expect and do contributions need to be increased? Most people understandably base pension contributions on budget rather than targeting a specific income need, but at what point do you want to find out how much pension you can expect. The closer you leave it to retirement the less time you have to do something about it and it may then be too late.
PleaseISSMP note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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