Pension Dilemma - bail out or remain invested

[darrinm]

Hello folks,

Wanted peoples view/take on something that has been going over and over in my head lately as I undertake my 'five year pension review'.

I have an Aegon pension through a previous employment and paying nearly £3k in annual mgmt charges on two funds. One is a passive Tech fund which has rocketed and can get elsewhere for much less and an active fund (high charges and an underperformer.

So the dilemma is:-

Remain invested with Aegon and continue to benefit from compounding on the Tech Fund over the long term.

Or...

Encash (in specie on these funds unavailable sadly) and transfer to my ii SIPP. I will lose the compounding effect already baked in but save on the charges and re-invest from scratch.

I'm about 5-10 years from drawdown.

Any thoughts/comments/insights are most welcome.

darrinm

[Alaric]

Encash (in specie on these funds unavailable sadly) and transfer to my ii SIPP. I will lose the compounding effect already baked in but save on the charges and re-invest from scratch.

Could you explain what you understand by "compounding effect already baked in" as I think you are imagining something that doesn't exist.

[darrinm]

Accumulation funds re-invest the income back into the fund to either elevate the price or distribute as additional units.

The baked in element comes from the fact I've held this fund for nearly 6 years and hence will have therefore gained more units or benefited from the increase in unit price.

Encashing and buying again at todays prices loses that 6 years of compounding growth.

[TedSwippet]

I have an Aegon pension through a previous employment and paying nearly £3k in annual mgmt charges on two funds. One is a passive Tech fund which has rocketed and can get elsewhere for much less and an active fund (high charges and an underperformer.

What are the charges on these funds as a percentage? £3k/year on £1mm would be "low charges"; £3k/year on £100k would be "high charges".

Also, check that you are actually paying the charges you think you're paying. Employers often negotiate a decent discount with their pension providers, but the provider's generic fund leaflets sometimes mention only the non-discounted charges. So maybe read both the provider's paperwork and your employer's own pension documentation carefully.

Encash (in specie on these funds unavailable sadly) and transfer to my ii SIPP. I will lose the compounding effect already baked in but save on the charges and re-invest from scratch.

In specie transfer out of an employer pension is regularly not on offer; the funds in these pensions tend to be non-retail. However, at worst you should only be out of the markets for a few days or weeks. You might also be able to engineer a partial transfer, which would mitigate that a bit. Or, are there any funds you could transfer to within this pension, even if temporarily, that can transfer in specie? Like Alaric above, I have no clue what you mean by your second sentence.

Finally, have you investigated the other fund options in this pension, as an alternative to transferring out? Perhaps tech has run its course for a while, or perhaps your approaching retirement might have you thinking about moving to less racy holdings, perhaps a passive tracker? Most employer pensions feature at least a reasonable range of tracker funds, and usually at reasonable annual charges too.

As one data point, even though I have a cheap SIPP with Interactive Investor, I retained my ex-employer group personal pension with Aviva, rather than moving it to my SIPP when I left. My ex-employer negotiated a superb discount. I hold BlackRock trackers at Aviva for (marginally!) lower fees than I can find for direct equivalents on Interactive Investor.

[TedSwippet]

Accumulation funds re-invest the income back into the fund to either elevate the price or distribute as additional units.

The baked in element comes from the fact I've held this fund for nearly 6 years and hence will have therefore gained more units or benefited from the increase in unit price.

Encashing and buying again at todays prices loses that 6 years of compounding growth.

Your first two sentences are correct, but I cannot see how they lead you to the conclusion you have in your third one.

Either you have more units of this fund (dividends distributed and then reinvested) or your unit prices are higher (dividends accumulated), with both of these in addition to any overall capital gain (or loss!) in the things the fund holds. No matter which of those two cases it is, though, if you sell this holding you will receive the equivalent cash at "today's prices".

[mc2fool]

Accumulation funds re-invest the income back into the fund to either elevate the price or distribute as additional units.

The baked in element comes from the fact I've held this fund for nearly 6 years and hence will have therefore gained more units or benefited from the increase in unit price.

Encashing and buying again at todays prices loses that 6 years of compounding growth.

That is extremely unlikely. Accumulation funds always have their units increase in price (rather than gaining more units) and you don't lose anything as a result of it being an acc fund on cashing out. Some insurance/pension funds may have exit fees and/or market value adjustments (MVA) or some other way of stinging you if you leave -- check out your fine print -- but I've never heard of the "loss" you describe.

[Alaric]

Encashing and buying again at todays prices loses that 6 years of compounding growth.

It would be a scandal if true, but you get market valus, which is more or less the same regardless of whether you held accumulation units or held income units and reinvested.

The price of accumulation units is usually higher than that of income units and if you hold accumulation units and sell, you get that price, not that of income units. Other than transaction and "out of the market" costs, there are no losses arising from the act of switching from one investment to another.

[darrinm]

Thanks guys, appreciate the feedback.

To Ted's points, the £3K charge is on a £400K portfolio and I'm getting clarification from Aegon on the percentage charge and the discount applied as it's not clear in their documentation. You're right employers do bag some good deals with pension providers...

darrinm