Pension profit only 2.3% a year

xingxing1118

Recently, I checked my friends pension account. He contributed 46,000 Euro from 2005-2015 for 10years. And since then he didn't contribute any money. His current pension value was 71,000 Euro which is unbelievable.... Same as only 2.3% compound Interest rate value??

Anyone can provide the rate of average yearly return on your pension?

Peregrinus

Without knowing exactly how much was paid in each year it's impossible to calculate the average annual return.

Most people's pension contributions are a percentage of their salary, and their salary tends to go up a bit each year due to progression in seniority, the occasonal promotion and general pay increases, so their pension contributions go up with it. If we assume that this guy paid pension contrbutions of €3,660 in 2005 and then increased that by 5% each year, then after 10 years he would have paid in just over €46,000. If that had accumulated to €71,000 by 2024, my back-of-the envelope calculation suggests that that implies an average annual return of about 3.1%.

Which is better than 2.3% but still is, yeah, not great.

You don't say how your friend's pension fund was invested. Most pension funds offer a choice of investment options, some of which focus on providing a stable, but generally low, return, and some of which provide a more volatile, but generally higher return. People who have a horror of ever seeing their balance go down will tend to tend to go for the more stable, cautious options. In the long run they pay for this by accepting limited returns — they don't get much more than if they had put their money in the bank to earn interest.

One possible explanation for your friend's disappointing return is that his money was invested in a low-risk, low-return fund like this.

Another possiblity is that your friend's pension fund was invested in a high return, but volatile, fund, and the €71,000 valuation was made at a point just after the fund had taken a dive. Value it again in 6 or 12 months' time and it might be a very different story.

Yet a third possibility is that his returns have been kept low by high management charges imposed by the fund manager.

It's certainly worth your friend's while to investigate this; there may well be things he can do that will improve the returns he is earning. But there isn't enough information in the OP to say what those things might be.

lau1247

He might have 46K invested over 2005-2015 but between 2005 to now, few things had happened such as 2008 financial crisis and Covid for example. So a good chunk of it may be wiped off and had to be built back up over time.

893bet

Seen this in my own pension also. Pitiful growth. Despite stock markets being all time highs.

Jim2007

https://www.boards.ie/discussion/2058370525/pension-profit-only-2-3-a-year

If you are going to start reviewing other people's pension funds and commenting on it, then you are also going to have to learn how to do it and this is not the way.

To start with you need to know the annualised return on the pension, not some figure you made up yourself, next you need to understand the the fund rate of return may be very different to the individual's return rate because of timing and personal asset allocations. So you need to know a lot more information before you can comment on performance.

Likewise, comparing the return rates on random pensions is also meaningless because again you have no idea of what was going on in those funds or with those individuals.

So before going on you need to bring a lot more information to the table in order to get a meaningful response.

Jim2007

We seem to have the same discussion every few months….

So to be clear, you can't make a meaningful performance assessment of a fund against anything but it's benchmark or a fund using the same benchmark. And you can't make a meaningful performance assessment for an individual invested in that fund through a pension without constructing a composite benchmark for that pension.

So statements like my pension only did 3.1% while the STOXX 50 did 12% is meaningless! Because no pension fund is going to have that as on objective, it would almost certainly be too risky for the profile of most people invested in the pension never mind being barred by law.

xingxing1118

II didn't do detailed calculation I just checked how much and how long he has contributed and how much current pension value is, so 2.3% average return was just rough calculation result...

But You are right, probably his return is 3.1% which is stil unacceptable return. If he bought physical gold since 2005 to 2010,his 46k would become around 250k today.

1% of pension management cost is killing pension value, If I buy 500k gold in safe box I only need pay 300-500 Euro safe box charge but with pension I need pay €5000 Euro a year. And gold average yearly return for long term is roughly 8-10%.

I contributed some pension in the past few years but wasn't happy with it specially after checked my friends 19years pension result....

I Hope anyone who has 6-8% average return with his pension can message me to proof that my friend case(3.1% average return )is an exceptional case.

Even though we can get 40% tax refund at the beginning but with 1% management charge for the long term it's not worth to contribute to pension if most pension average return is 3-4%??

xingxing1118

Your approach is good, I was wondering how much average return for pension in most cases, I hope my friend case is exceptional case and he probably contributed to the most safe fund, that's why his Current pension value is only 71k. Anyway he used to working at well established company in Ireland so his financial provider supposed to very good.

I have some money sitting on my company account but afraid to contribute it to pension as once I contributed I can't withdraw it till retirement age and was shocked with my friends pension return.

greyday

The high risk funds when you are young is the advise I received when leaving a previous company 12 year ago, I followed that advice and 51k with no more contributed since than has grown to 126k, the fund was fully invested in stock markets.

xingxing1118

7.85% average return, this is good so far.

SteelyDanJalapeno

https://www.boards.ie/discussion/comment/122655643#Comment_122655643

One big difference here if you buy gold, is you've paid tax on the 500k initially (split higher and lower band, let's say 30%) and you'll pay capital gains on any increases it makes of 33%.

If you're on the higher rate of tax in Ireland, you nearly need to include the tax avoidance gains as a part of your % roi

Jim2007

https://www.boards.ie/discussion/comment/122655643#Comment_122655643

You did not do a detailed calculation because you can't as you have neither the knowledge nor the data to do it. Your understanding of the calculations, the risks and pension management is fundamentally flawed and as a result your conclusions are just plain wrong.

The expected annualised return on pension funds in Europe is about 2% -3%, I'm telling you that as someone who has been doing performance and attribution for over three decades. And this should not be at all surprising because very very few funds can consistently out perform the economies they are invested in over the long haul, yes some funds will out perform are certain periods depending on their investing objective, such as lifestyle funds in the early years, but no over all.

I've no doubt you'll find pension funds with higher rates of return today, but in say 30 - 40 years time when it time to take the money out - the annualised return with be 2% - 3%.

McCrack

https://www.boards.ie/discussion/comment/122655527#Comment_122655527

Such a lecturing and condescending tone off this

Jim2007

https://www.boards.ie/discussion/comment/122656676#Comment_122656676

Personal finance is a very serious business, mistakes made with pensions and long term savings can be live changing and unfortunately many people rely on the internet for this type of thing. So yes it is my intention to be blunt so that anyone else reading it is under no illusion - this is not the way.

Peregrinus

But You are right, probably his return is 3.1% which is stil unacceptable return. If he bought physical gold since 2005 to 2010,his 46k would become around 250k today.

That crucially depends on exactly when he bought the gold. Over the the ten years after 2005 the price of gold flucuated wildely. Contrary to popular belief, gold is a highly volatile asset. If it is the case that your friend choose to invest in the stable, conservative fund, then its very unlikely that the alternative of investing in gold, even if it had been available to him, wouild have been consistent with his investment objectives.

Shauna677

https://www.boards.ie/discussion/comment/122655710#Comment_122655710

that's the way to go.

coylemj

OP, there is a fundamental flaw in your maths.

Your quoted return of 2.3% p.a. is based on a lump sum investment of 46K in 2005 now being worth 71K i.e. a ROI of 54% over 19 years. But your friend didn't invest 46K in 2005, his money was invested over a 10 year period, up to 2015. If we do a crude calculation based on the midpoint (14 years), the return is 3.15%. Which tallies with Peregrinus' 'back of the envelope' calculation of 3.1% in post #2 above.

It still doesn't seem like a great return but that is almost certainly down to his choice of fund. Any fund which was skewed towards equities would have achieved a far better return over the past 9 years. Zurich's Prisma 4 fund which has 44% invested in equities achieved an annualised return of 6.6% p.a. over the past 10 years. And that is not their most aggressive fund.

xingxing1118

Your answer is what I want. Yes, I am not familiar with pensions. I met six financial advisor these years. The information they conveyed to me was that the overall return of pensions is about 5-6%, but I never believed it. So I checked my friend’s pension account with his permission.(I checked his pension account two years ago as well)

I wanted to confirm whether my guess of an average pension return -2-3.5% was correct.
And management cost is unbelievable for the long term.

You have been in this industry for many years, and you actually said that the average pension return in Europe is 2-3% (of course only for long-term, such as 30 years), that should be it. I believe it depends on the time period of investment and the type of fund chosen, but generally speaking, the return in 30 years is 2%- 3.5%.It’s make sense for me. I am happy to get this information.

halkar

I think pension providers have set numbers for their low, medium, high risk chosen by their clients. Probably something like around 2.5, 5 and 7.5% give or take 1 - 2% . Even if they make 50% out of your money they will give peanuts back. Better invest some of it yourself.

xingxing1118

I accumulated gold since 2010 and I only need to pay €250 a year for safe box fee. I am also under self-managed pension and they are charged - 1.8% of my pension value. I can reduce my pension cost to 1%, if I contribute over 200k. but I am not happy even with 1% pension cost. The pension charge increases same speed as your pension value grows. I am trying to never sell my gold to avoid capital gain tax. Pension charge is more than 40% tax refund value

greyday

Depending if you self manage or not, the costs vary considerably, I self manage and I am charged 0.18% and 0.14% on the funds I chose to invest in.

Over the last 10 years, one fund lost 22% and the other 28% in a bad year, they made that back in next 18 months, that's the type of volatility you need to stomach if you go with the higher risk funds.

Henry Ford III

https://www.boards.ie/discussion/comment/122657421#Comment_122657421

No. You have no idea what you're on about. Your maths are faulty too.

Equities as always will tend to outperform other investment areas over time. It has always been that way.

Gold is fine in turbulent times but won't match equities over the longer term. It's a short term safe haven. 1% AMC isn't huge on a strong performing fund, but is on something that's not doing so well. Regular review is vital on all pensions to avoid the very scenario you've mentioned.

Lastly how could you get a 40% tax deduction on your pension contributions invested into gold?

Dr Robert

The massive tax break on pensions mean it's the easiest way of saving a big pot of money.

It's a shame a lot of people don't understand them.

Ideally, nobody should leave school not understanding them. It's more important than a lot of other things I was taught in school.

The J Stands for Jay

https://www.boards.ie/discussion/comment/122655643#Comment_122655643

First Google result:

"Over the past 100 years, gold has yielded a 2.1% average annual return. Over the same period, the Dow Jones Industrial Average (DJIA), an index of the US stock market, has yielded a return of approximately 7.3%"

The J Stands for Jay

https://www.boards.ie/discussion/comment/122657421#Comment_122657421

1.8% charges to self manage? You're destroying value at both ends.

I am trying to never sell my gold to avoid capital gain tax.

If you're never going to sell it, then what's the point?

Buddy Bubs

@xingxing1118 I think you should stop advising your friend you are misleading them at best

Just a very quick example I had a prsa that I paid 6k into in 2009 and 2010 then I bought a house and stopped it. I got 40% tax relief so this only cost me 3600. I was in my 20s at the time and I had a fairly aggressive fund.

In 2018 I decided to transfer this into my work prsa and the found it had grown to 12000 after charges. I was then charged a fee to move it into new prsa, about 3% or 360 euro

So a net cost of 3600 to me grew to 11600 in 8 to 10 years or tripled in value. Even if I take tax relief out of the equation, it doubled in value even after charges. This is somewhere in the region of 7 or 8% compounded annually.

There was nothing amazing about that fund, it was diversified and aimed to track indexes around the world and all pension providers would have had a similar fund with similar returns. But all have cautious funds that returned 3% over that time too, probably weighted heavily towards bonds rather than equities. So 3.1% is not exceptional case at all, just a low volatility fund which is a viable choice to make.

Do you know what your friends pension is invested in? Are you taking tax relief into their overall position? What age is your friend? Is he risk averse?

You can't get 40% relief on gold unless there is an approved pension fund that invests only in gold, maybe there is, maybe there isn't. Would be reckless to put everything in one commodity like that but maybe it's possible through pension.

Jim_Hodge

https://www.boards.ie/discussion/comment/122657421#Comment_122657421

Firstly, it's now clear you haven't a clue about any of this. Please leave your friend and their pension to their own devices and do not attempt to offer advice.

You're getting no pension tax relief on Gold. In the medium to long term stocks and bonds always outperform gold.

As for trying never to sell the gold…what's the point of that?

JVince

https://www.boards.ie/discussion/comment/122655430#Comment_122655430

This is why people need proper INDEPENDENT advice. You'll find you are in a very low risk fund with little exposure to equities. Fine if you are 70, but not if you are under 50.

PAY an expert who doesn't get commission from fund managers.

A pension I put €68,000 into between 1999 and 2006 has a value of almost €350,000 currently because I have someone I pay to have a full review every year of the different pensions I have. All of which have had strong growth except 2022.

Most pension providers allow you switch funds every year (and more often) with no penalties.

893bet

https://www.boards.ie/discussion/comment/122664843#Comment_122664843

it’s not in low risk. It was on one of the age based ones so should have been in medium to higher risk investment.

It’s a company pension and was with “new Ireland”. Company has since moved them over to Mercer.

L1011

2011-2014 pensions levy will have eaten some of this.

JVince

https://www.boards.ie/discussion/comment/122664847#Comment_122664847

I suspect it was risk rating of 3 which is relatively low. Corporate plans like to be safe.

MackTheMack

https://www.boards.ie/discussion/comment/122657421#Comment_122657421

As others have alluded to, it would be best to disengage from offering your personal opinion as none of this can be considered advice.

It was mentioned that you have met with 6 Financial Advisers this year and this is your conclusion. There are many reasons why the pension has performed the way it has yet you still haven't given the exact details on it so the people here can offer their insights (although believe it is not required at this stage).

Please don't conflate the idea of poor performance with the idea that any pension is not worth it. They are the best vehicle of investing available in Ireland with the current operating tax system

xingxing1118

https://www.boards.ie/discussion/comment/122666890#Comment_122666890

Your opinion should be right. but the experts I met did not give me satisfactory answers, so I am hesitant.

xingxing1118

https://www.boards.ie/discussion/comment/122664770#Comment_122664770

Thanks for the detailed information. I didn't give my friend any advice. He only agreed to let me check his pension account as I was looking for some information about pensions. I was afraid to deposit more money into my pension account because I'm worried about whether pension account charge(1%) will eat into the value of my pension. But obviously if you choose to invest in a fund with a large proportion of stocks, your pension account should have a return of 6%-9% based on past S&P500 performance. And Yes, we do not know future performance…

From the post - learned that pension accounts and private stock accounts are the same. Depending on which fund you choose, the rate of return is completely different. Of course, the risks are also different. And pension accounts have obvious tax advantages.

xingxing1118

https://www.boards.ie/discussion/comment/122661984#Comment_122661984

I bought Gold ETF through my pension account and same time bought physical gold with my own money.

Henry Ford III

https://www.boards.ie/discussion/comment/122672594#Comment_122672594

Which approved Irish pension product did you use?

Peregrinus

From the post - learned that pension accounts and private stock accounts are the same. Depending on which fund you choose, the rate of return is completely different. Of course, the risks are also different. And pension accounts have obvious tax advantages.

Pension products and non-pension products are alternative vehicle for investing pretty much the same range of underlying assets — e.g. you can invest in shares, managed funds or government bonds through a pension product; you can invest in shares, managed funds or government bonds through a non-pension product.

If a non-pension product and a pension product are invested in the same underlying assets, the gross return will of course be the same. The net return, after paying expenses, will be different; the pension product will usually have the lower net return because it has a layer of administration and compliance obligations that it costs the product provider money to discharge.

However the tax advantages associated with the pension product will usually dwarf this extra cost. Thus the net return to th investor, after tax, is typically much higher for the investor who uses a pension product that for the investor who does not.

Buddy Bubs

https://www.boards.ie/discussion/comment/122672572#Comment_122672572

With tax relief of either 20% or 40% why would you be worried about the 1% management charge?

If you contributed 10k, your fund goes up by 10k and your charges are an extra 100 euro. But you have got tax relief of either 2000 or 4000.

I understand the worry about a fund giving negative returns but even at that the tax relief insulates you against a lot of negative returns

Modulok

Good lord.

If you are under 45, invest 100% in a passive index fund tracker. S&P500 or a global index fund. It must be passive. Not active. This is how you will average 7-10% annualized returns yoy over periods of 20 years or more. After 45, you can gradually introduce some exposure to bond index funds, and slowly reduce from 100% equities to a more conservative portfolio of, say 60:40 stocks:bonds by the time you retire. Aim to have at least five years worth of living expenses in bonds by the time you actually retire.

The fellow above who said most European pensions average 2-3% per year…that may be, but it's not because that's what the market returns. It's because all of those people are clueless and being consequently ridden by their 'advisors'.

AndrewJRenko

https://www.boards.ie/discussion/comment/122655430#Comment_122655430

https://www.boards.ie/discussion/comment/122655430#Comment_122655430

What fund were you invested in?

Dr Robert

https://www.boards.ie/discussion/comment/122693446#Comment_122693446

This is key information!

Henry Ford III

https://www.boards.ie/discussion/comment/122693316#Comment_122693316

Two points on that:-

1/. There's no such thing as universal investment advice, because we are all individuals with different financial needs and with different attitudes to risk and reward.

2/. The cheapest investment isn't necessarily the best. I've been involved with many "clean ups" suffered by many people such as yourself who are convinced that good financial and investment advice isn't worth its cost. In my experience the opposite is true.

Modulok

https://www.boards.ie/discussion/comment/122694292#Comment_122694292

Fee-only financial advice on approaches to retirement and on mindset may well be worth the cost, but advice that pushes actively managed funds and only generates 2-3% over many years, is shameful.

Henry Ford III

https://www.boards.ie/discussion/comment/122696018#Comment_122696018

Simplistic and incorrect imho. I don't believe those claims in any event.

There's plenty of evidence to confirm that clients using the services of a financial advisor tend to enjoy better outcomes than those that don't. Finding a good one is the key.

These days all fees and commissions are disclosed so nothing is hidden. Some clients (those who wouldn't be willing/able to pay a fee) suit a reasonable competitive commission structure for advisor payment. It's a competitive area so rates have to be keen.

Remember Equitable Life? They never paid 3rd party commission. Many of their clients still lost money. There have been plenty of other examples since. Geared property? People lost 100% of their investment on that.

Good financial advice is paramount imho, and is well worth it's cost.

Modulok

Are you in the business of selling financial advice?

Henry Ford III

https://www.boards.ie/discussion/comment/122697844#Comment_122697844

That's frankly none of your business.