Birmingham Lake

"Wealth is not his that has it, but his that enjoys it"

-Benjamin Franklin

Traveling in the Alps

"Wealth consists not in having great possessions, but in having few wants"

-Epictetus

Traveling in Crete

"Time is the most valuable thing a man can spend"

- Laertius Diogenes

Morris Dancing Birmingham

"The glow of one warm thought is to be worth than money."

-Thomas Jefferson

Alan Moran Independent Financial Adviser Birmingham

"I don't care too much for money for money can't buy me love"

- The Beatles

Traveling in the Red Sea

"Simple, genuine goodness is the best capital to found the business of this life upon. It lasts when fame and money fail, and it is the only riches we can take out this world with us."

-Louisa May Alcott, Little Men

cliffs of dover

"And though I have the gift of prophecy, and understand all mysteries, and all knowledge, and though I have all faith, so that I could remove mountains, and have not charity, I am nothing."

-St. Paul

Finance in the Big City

"Not he who has much is rich but he who gives much"

-Erich Fromm

Birmingham UK Sunset

"Life is what happens to you while you are busy making other plans"

-John Lennon

Travels - A well lived life

"I pity that man who wants a coat so cheap that the man or woman who produces the cloth shall starve in the process"

-Benjamin Harrison

The 5 Minute Money Guide: The Pension Prize

Audio Version

pension-prize (1)

The Pension Prize

What exactly is the ‘prize’? Put simply - more money for you, in your retirement.

To highlight the impact returns can make we will start by running through a couple of hypothetical or theoretical examples, somewhere in amongst this there may well be something which closely relates to your situation.

In each case we will show you comparisons between what we describe as ‘below par’ returns and ‘above par’ returns. These are not meant to illustrate what we suggest might happen or will happen, but merely to outline the difference future returns, when stretched over time, make to the eventual pot size.

Example 1

Two savers both age 35 with £30,000 in a pension fund today.

Saver #1 invests and gets a below par return of 3% per year (1) Saver #2 invests and gets an above par return of 6% per year (1)

How much does saver #1 have at age 60?

£62,813

How much does saver #2 have at age 60?

£128,756

pension saver example
Pension saver example

Saver # 2 has simply invested ‘better’ and got a better return, as a result he/she has around £66,000 MORE in their pot at age 60. That’s the prize!

Stretch this forward a little and imagine that they actually invested for another 5 years, to age 65 (instead of age 60) – what’s the difference now?

How much does saver #1 have at age 65?

£72,818

How much does saver #2 have at age 65?

£172,305

Nearly £100,000 MORE.

Finally at age 70

How much does saver #1 have at age 70?

£84,416

How much does saver #2 have at age 60?

£230,583

By age 70 the above par investor has £146,000 MORE than the below par investor, on a starting pot of £30,000.

(Note (1) – 3% per year and 6% per year are compounded figures, assuming this is the net return per year after all charges have been taken into account. This is not a formal illustration of a pension plan. It is an illustrative basis for showing the value of a £30,000 pot at those future points, to stress the compounding effect and differences that build up)

pension saver example scenario
larger pension vs smaller pension

Example 2

In this example we consider two investors age 55, who have both built up £150,000 in pension plans, where they have radically different experiences in the ten years until they aim to start taking their benefits. One pursues a strategy which produces 2% growth per year, the other gets 7% per year, so the difference is now stretched to 5% per year in the returns they receive:

Saver #1 invests and gets a below par return of 2% per year (2) Saver #2 invests and gets an above par return of 7% per year (2)

How much does saver #1 have at age 65?

£182,849

How much does saver #2 have at age 65?

£295,072

Saver #2 has simply invested ‘better’ and got a better return, as a result he/she has around £112,000 MORE in their pot at age 65.

(Note (2) – 2% per year and 7% per year are compounded figures, assuming this is the net return per year after all charges have been taken into account. This is not a formal illustration of a pension plan. It is an illustrative basis for showing the value of a £150,000 pot at those future points, to stress the compounding effect and differences that build up) Don’t believe that 5% per year difference in returns is realistic? Then you need to read on...

There is nothing here which is revealing. All we have attempted to do, using these basic examples is show how much difference being above par makes to

being below par. It is obvious that higher returns will make more difference and this difference is seriously accentuated over time, but even in the relatively shorter periods the differences still stack up.

example two pension savers

Research shows that the swing in returns from funds in the same sectors can be easily around 5% per year.

For example, the average past performance of the best performers is that much higher than the worst performers, based on historic returns. The level of difference can vary from sector to sector, higher risks sectors (such as equities) tend to vary more than lower risk sectors (such as bonds) but the principle point remains – fund performance really does vary, surprisingly so based on past returns.

ANY INVESTOR WHO HAS MONEY INVESTED IN PENSION FUNDS SHOULD STRIVE TO OPTIMISE THEIR RETURNS BECAUSE THE PRIZE IS A REAL ONE... MORE MONEY IN RETIREMENT

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Readers should not rely on, or take any action or steps, based on anything written in this guide without first taking appropriate advice. Interface Financial Planning Ltd cannot be held responsible for any decisions based on the wording in this guide where such advice has not been sought or taken. The information contained in this guide is based on legislation as of the date of preparation and this may be subject to change.