Dangers of charges

[Alaric]

A story in the Mail gives a reminder of the dangers of leaving assets unattended in a high charging environment.

http://www.dailymail.co.uk/money/pensio ... nsion.html

SIPPs in their pre-internet form could be very expensive. Personal pension funds left unattended could also have the mice aka fund providers and managers nibble away at the assets with charges, but generally the appetites weren't as great.

[TedSwippet]

This is the Daily Fail so the accuracy of the report is questionable, but this is the part of it that puzzles me most:

... without his knowledge, his pension company sold all his shares in 2005, raising £17,000 to pay the annual fees for his plan. John only found out late last year.

The bulk of this pension appears to have been Amazon and Qualcomm shares, and contributions stopped when it was worth £50k in 2000. Both Amazon and Qualcomm stock performed badly in the aftermath of the Y2K tech crash, with both approximately halving in value between 2000 and 2005. And US tech shares typically pay low to no dividends. So it is entirely possible that this gentleman's pension had already shrunk a lot by the time any cash element to pay the charges ran out.

So why did Rowanmoor choose to sell all the shares in 2005 to raise cash to cover charges? Were the accrued and overdue charges really that large, or did they pre-fund the cash element to pay future charges? Or did the Daily Fail just misreport the details, and the shares were in fact sold over time? Amazon did not surpass its pre-2000 peak until 2009, and only then started to really take off, and Qualcomm not until 2014, since when it has again declined somewhat.

The other obvious question -- and to my mind the main lesson here -- is why would anyone completely ignore a pension for seventeen years, short perhaps of being in a coma? This outcome could have been easily avoided with a bit of attention.

[Alaric]

The other obvious question -- and to my mind the main lesson here -- is why would anyone completely ignore a pension for seventeen years

It's wealth you cannot access until retirement and had it been a defined benefit scheme, leaving it to its own devices would have been quite feasible. It's the level of charges for administering an inactive account that are really high.

But I agree, checking annual statements is necessary.

[XFool]

So why did Rowanmoor choose to sell all the shares in 2005 to raise cash to cover charges? Were the accrued and overdue charges really that large, or did they pre-fund the cash element to pay future charges? Or did the Daily Fail just misreport the details, and the shares were in fact sold over time? Amazon did not surpass its pre-2000 peak until 2009, and only then started to really take off, and Qualcomm not until 2014, since when it has again declined somewhat.

That's the same question that occurred to me.

The other obvious question -- and to my mind the main lesson here -- is why would anyone completely ignore a pension for seventeen years, short perhaps of being in a coma? This outcome could have been easily avoided with a bit of attention.

Yes. He was described as a "businessman" and that his haulage company had "got into difficulties". Well, I'm no businessman but it seems to me if he ran his business affairs as incompetently as he appeares to have run his pension affairs it's not surprising the business "got into difficulties"!

Of course, as ever with these stories, we need to bear in mind that we don't know the full and true facts.

[TedSwippet]

The other obvious question -- and to my mind the main lesson here -- is why would anyone completely ignore a pension for seventeen years

It's wealth you cannot access until retirement and had it been a defined benefit scheme, leaving it to its own devices would have been quite feasible. It's the level of charges for administering an inactive account that are really high.

Yeah, I should probably rephrase my comment to "... why would anyone completely ignore this pension for seventeen years?" It's not a defined benefits scheme, and looks to me to be about the farthest thing from a passive defined contribution portfolio that one could imagine.

Looking at Rowanmoor's published charges for a SIPP, they aren't the skimpiest one could find, but they don't look usurious either. After setup the ongoing annual fee appears to be £495/year. The 1%/month late payment surcharge is unappealing, but even over five years this compounds £495 to just under £900, so it seems like it would take a lot more than even that to fully deplete even a post-crash £25k pension pot.

It is unclear where the article's quoted £1365 a year for charges comes from. Maybe some combination of annual fees and late payment surcharges.

My guess is that this gentleman invested up to or perhaps even at the peak of the speculative tech stock bubble in the late 90s, and then lost much of his money to poor stock performance. In 2000 when the article values this pension at £50k, Amazon shares traded over $80. By the first quarter of 2001 they traded below $10. Over the same period, Qualcomm dropped from $100 to $25.

On these numbers, a £50k balance at the start of 2000 heavily weighted to US tech stocks might reduce to perhaps £8k by mid 2001. And that low level of balance is easily depleted quite quickly. Even Rowanmoor's somewhat moderate-looking annual fee would be more than 6% of assets. The quoted £1365 a year 'average' cost from the article would be 17% of assets.

The stock recovery did not come quickly enough to overcome that. At £1365 a year, all gone within six or seven years, then.