Most people don’t have the aptitude for managing investments. And there’s no point in being macho about this.
People who imagine they are smart enough to trade their way to millions are likely to end up poor. So use our new Tracker Pension Portfolio to sleep at night and retire in comfort.
Some time back we launched our Model Pension Portfolio of actively managed funds, designed for the growing number of investors using SIPPs to manage their own pension funds.
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Active funds need active management
Our Active SIPP portfolio includes property, bonds and shares in Europe and Japan as well as the UK. It will require regular reviews and changes. And because these are actively managed funds, the annual charges will average about 1.60% a year on the value of the fund.
This assumes you pay no initial charges on purchasing the funds, but in practice you will probably pay 1-1.5%, so the actual cost will be somewhat higher.
There is another way: low-cost investing using tracker funds, which can slash charges by two-thirds. Apart from cost, the key point is that using tracker funds avoids the problem of picking good investment managers.
So you are just left with the ‘asset allocation’ decision - how much in each basket? - and while you might want to review this annually, if you’re under 40 you could probably stick with the same allocation for several years.
Investing a lump sum? Take advice to help make the right choices
Investing for the long haul
The Tracker Pension Portfolio is a long-term growth portfolio designed for someone with at least 15 years to ‘retirement’, defined here as the point at which they may want to start withdrawing income from their fund.
It therefore has 70% in shares and resources, 20% in property and 10% in fixed interest. You might want to start reducing the percentage in shares at between 10 and five years from ‘retirement’. This 70-20-10 asset allocation is the same as the Model Pension Portfolio. But while that has an annual cost averaging 1.60%, the Tracker Pension Portfolio has an annual cost of just 0.44%.
The initial costs of buying the Tracker Pension Portfolio through an online sharedealing account should be no more than £15 per trade or £195 in all. The total annual cost of under £90 really is as cheap as chips bearing in mind that it gets you invested in everything from bonds to emerging markets, commercial property, energy and gold. In a low-cost SIPP like sippdeal’s you pay no annual management charge, so that £90 is the sum total of your annual costs.
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The £20,000 Tracker Pension Portfolio
| Asset class | Investment | Amount | Cost | % of total |
| Bonds | | £2,000 | | 10% |
| i-shares £ Corporate Bond (SLXX) | £1,000 | 0.20% | 5% |
| i-shares E Corporate Bond (IBCX) | £1,000 | 0.20% | 5% |
| Property | | £4,000 | | 20% |
| i-shares FTSE EPRA/NAREIT UK Property (IUKP) | £2,000 | 0.40% | |
| i-shares FTSE/EPRA European Property (IPRP) | £2,000 | 0.40% | |
| Resources | | £2,000 | | 10% |
| ETF Energy (AIGE) | £1,000 | 0.49% | 5% |
| ETF Gold (PHAU) | £1,000 | 0.39% | 5% |
| Shares | | £12,000 | | 60% |
| db x-tracker FTSE All-Share Index (XASX) | £2,000 | 0.40% | 10% |
| i-shares FTSEurofirst100 (IEUT) | £2,000 | 0.40% | 10% |
| i-shares DJ EuroStoxx Small Cap (DJSC) | £2,000 | 0.40% | 10% |
| i-shares S&P 500 (IUSA) | £2,000 | 0.40% | 10% |
| db x-trackers MSCI Japan (XMJP) | £2,000 | 0.50% | 10% |
| db x-trackers MSCI Emerging Markets (XMEM) | £2,000 | 0.70% | 10% |
| db x-trackers MSCI Emerging Asia (XMAS) | £2,000 | 0.70% | 10% |
| Total | | £20,000 | 0.44% | 100% |
Get information on Exchange Traded Funds at the LSE and ETF Securities
Under the bonnet
Exchange Traded Funds (ETFs) are funds issued in the form of shares traded on the London Stock Exchange (LSE). A bank - Barclays in the case of i-shares, Deutsche Bank in the case of db x-trackers - creates the fund, manages it and collects the management fee.
Essentially, the sponsor bank has to hold the relevant assets at all times to match investors’ ownership of units. The units are repriced minute-to-minute and can be bought and sold at any time in LSE trading hours.
Exchange Traded Commodities (ETCs) are newer and give access to all sorts of commodities but operate on a similar basis. We’ve included gold and energy in this long-term portfolio. Unlike shares, ETFs and ETCs do not suffer Stamp Duty at 0.5%, which is another small but useful saving for investors, worth £100 on a £20,000 portfolio.
Confused by the latest IHT changes? Take advice here
Choosing sectors and funds
We can get most of the asset classes we want using ETFs. We can get A-rated UK and European corporate bonds to give us our basic stake in fixed interest. We can get both UK and European commercial property.
We can get UK shares, US shares and European shares, but can’t get UK small-capitalisation shares. In fact, apart from the DJ EuroStoxx Small Cap, all the share ETFs are based on large company shares. That is a bit of a drawback, but it will be a while before we know how much difference it makes.
And using ETCs means we can also get a physical stake in energy (oil and gas) and gold, without having to add the risk involved in investing in mining or oil exploration companies. Since the prices of these commodities don’t tend to move in line with share prices, they add a useful extra element of diversification to the portfolio.
So the Tracker Pension Portfolio provides a good spread of bonds, property, natural resources and shares, all for a fraction of the costs you would pay either buying funds or actively managing your own share portfolio.
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How important are cost savings?
Keeping down the annual costs of your portfolio will make a difference to your retirement pot. But quite how a big a difference will depend in how markets perform. To show why, I’ll take two scenarios: one in which investments grow at 7% a year for 15 years, and one in which they grow by 12% a year.
How costs affect investment returns
| | High-cost Plan | Low cost plan | High cost plan | Low cost plan |
| Gross annual return | 7% | 7% | 12% | 12% |
| Cost of management | 1.6% | 0.44% | 1.6% | 0.44% |
| Net annual return | 5.4% | 6.56% | 10.4% | 11.56% |
| Value of £20k portfolio after | | | | |
| 5 years | £26,100 | £27,700 | £33,500 | £35,500 |
| 10 years | £34,300 | £38,400 | £56,000 | £63,200 |
| 15 years | £44,800 | £53,400 | £94,500 | £112,300 |
The difference between the payouts is the same in percentage terms: the low-cost plan delivers 6% more after 5 years, 12% more after 10 years and 19% more after 15 years whether the annual growth rate is 7% or 12%.
But real money is different from percentages. If you get a low rate of return of 7% for 15 years, you will be far happier to get an extra £8,600 from the low-cost plan than you will be if you end up with £17,800 extra thanks to a 12% growth rate. Obvious, really - if you only have a little, then having a little more is worth more to you than if you already have a lot.
Since we have no way of knowing now whether returns will be high or low over any period in the future, it makes sense to have modest expectations, and this means cost savings really are worthwhile. And look at it another way: the high-cost plan managers have effectively taken £17,800 of your money over 15 years (assuming a 12% return). Do their efforts really deserve them collecting such a big chunk of your money?
Investing a lump sum? Take advice to help make the right choices
Lots more ETFs
In addition to the ETFs listed on the LSE, there are hundreds more listed on US and European stock exchanges. While you may be able to buy these through an online sharedealing account, you may not be able to get full information on them.
In any case, sponsors are likely to list a lot more of them on the LSE over the next year or two, giving you more scope to include other asset types in your portfolio. Coming soon: more agricultural commodities and timber.
Investing a lump sum? Take advice to help make the right choices
Important Notice and Risk Warning
The EveryInvestor Model Portfolios are for general guidance only and do not constitute a recommendation for any investor. EveryInvestor does not provide individual investment advice.
Your own personal circumstances and tax position must be taken into account in selecting investments. We recommend that you obtain advice from an independent financial adviser before making investment decisions.
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance.
