Advice about including a property fund in my pension plan

[TheMotorcycleBoy]

Hi Folks,

I've been perusing the available funds in my Fidelity work pension options. By way of an introduction to this post I've already decided on splitting my allocations as follows:

25% in a medium-high risk global equity with UK fund with 0.2% annual charge
25% in a medium-high risk global equity ex-UK fund with 0.2% annual charge
25% in a medium risk global "consensus" fund (mainly equities, but perhaps a fifth to quarter fixed income, plus some cash) with 0.2% annual charge

For the remaining 25% I'm considering allocating to 2 or 3 of the higher charge (but still less than 1%) funds. I'm toying with the idea of about 8-10% of my total allocation in a property based fund, and I wondered what opinions people had on such a move. e.g "don't - property is a rubbish idea", "maybe, but bear this in mind..." etc.

If relevant: I'm 50 years old, and I'm planning on staying in employment till at least 65 years (but who knows?), and I have about £190k in my pension already. My wife Mel is 44 years and probably has about £15k in a very old fund, that she has just started contributing into again.

I was considering one of either of these property funds:

FIDELITY L&G MANAGED PROPERTY FUND - CLASS 5 with charge 0.82%
This life fund invests in an underlying fund managed by Legal & General Assurance (Pensions
Management) Ltd. The objective of the underlying fund is:
The Fund aims to outperform the AREF/IPD UK Quarterly Property All Balanced Funds Index over
three and five year periods. The Fidelity fund invests in the underlying fund through a reinsurance
agreement with Legal & General Assurance (Pensions Management) Limited.

All Industrial        22.3%
Retail Warehouses     19.7%
Regional Offices      18.0%
Central London Offices16.4%
High Street Retail     8.4%
Leisure                6.0%
Shopping Centres       4.1%
Other                  5.1%

or this one:

FIDELITY L&G 70:30 HYBRID PROPERTY FUND - CLASS 9 charge 0.67%
This fund invests in an underlying fund managed by Legal & General Assurance (Pensions
Management) Ltd. The objective of the fund is:
The fund aims to provide diversified exposure to the UK Property market and Global REITS market.
The Fidelity fund invests in the underlying fund through a reinsurance agreement with Legal &
General Assurance (Pensions Management) Limited

Managed Property 70.2%
Global REITS     29.8%

So in summary, the questions I want to ask are:

1. In general does 8-10% of a property fund in my plan sound like a sane idea?
2. If so does anyone like one of the above funds more than the other?
3. Can anyone explain what is meant by "Managed property" and "REITs" what are the important differences to note from a pension holder's perspective?

many thanks
Matt

[pochisoldi]

Firing off at a tangent:
How easy is it to sell the property fund units?
Is there anything in the Key Facts/fund information documents regarding liquidity?

I ask this because funds investing directly in property may have a large amount of capital invested in an illiquid asset.
Yes they may have cash in hand (from rents, and lease premiums), but in the event of a large outflow of cash, it might take a long time to get the cash.

PochiSoldi

[Alaric]

Managed Property 70.2%
Global REITS 29.8%

REIT stands for Real Estate Investment Trust. It's a fancy name for quoted property and property development companies. These are quoted on the LSE in the usual manner, the only thing being special is that they allowed to pay out rental income without it having to be subject to Corporation Tax. As a consequence it is taxed at 20%/40%/45% in the hands of the investor. Not that is a worry for pension investors.

Managed Property just means that the fund owns the properties directly or as part of shared ownership.

An earlier poster mentioned liquidity since if push comes to shove, it's difficult to sell property quickly. From that viewpoint the fund with 30% liquidity is "better". If it's money that's going to be locked away for a decade or more, not being able to sell is a problem for the distant future.

Not that it tells you so much, but if you had taken the decision 5 years ago, which choice would have been better? As with all property funds, you are relying on the manager's judgement in property selection.

[TheMotorcycleBoy]

I take the points regard liquidity, but I'm planning on not selling any of the funds for probably at least 15 years. In fact I have never chopped and changed my pension fund in response to disaster TBH. I'm thinking that when I "draw down" the pension I will do this incrementally and the units sold as and when.

I'm working under the assumption that when I need the £££ from my pension I will be able to draw down blobs of it annually.

Back to the subject of property in a pension. Firstly I was only thinking of 8-10% max in property just as a sort of balance really, and secondly aren't property pension funds a bit like buying stocks that may go up or down, but also pay a dividend? Since isn't a lot of the value of due to a propery fund due to rent payments? By the way - I'm not intending to be arrogant in what I've just said, since I genuinely know very little about property pension funds and none of the fact sheets explain how much the value is attributable to property prices and how much is due to rent payments.

So given that we have "REITs" what then is "Managed property" is that not a byword for "rented-out properties"? Surely you'd not worry about it needing to be managed, were it not providing a revenue stream (i.e. rent)? And finally aren't property leases merely long-term rent agreements?

thanks Matt

[Alaric]

what then is "Managed property" is that not a byword for "rented-out properties"?

It's just everything else in the fund. Actually you may find that the particular "70/30" fund doesn't directly hold properties, rather it just holds units in some other L&G fund or funds. Nothing wrong with that, but you have to be sure they aren't double charging.

[TheMotorcycleBoy]

what then is "Managed property" is that not a byword for "rented-out properties"?

It's just everything else in the fund. Actually you may find that the particular "70/30" fund doesn't directly hold properties, rather it just holds units in some other L&G fund or funds. Nothing wrong with that, but you have to be sure they aren't double charging.

Thanks,

Two more questions for you, Alaric (or anyone else for that matter)

Firstly, is 8-10% of propery in a pension plan a reasonable idea to add some balance/diversify?

Secondly regards the underlying "property funds", do they by and large aim to make as much £££ on rental income as they do any appreciation of the value of the properties that they invest in?

Matt

[TheMotorcycleBoy]

what then is "Managed property" is that not a byword for "rented-out properties"?

It's just everything else in the fund. Actually you may find that the particular "70/30" fund doesn't directly hold properties, rather it just holds units in some other L&G fund or funds. Nothing wrong with that, but you have to be sure they aren't double charging.

I just found this

https://fundcentres.lgim.com/srp/docume ... e-Fund.pdf

and wondered if was the underlying L&G fund that Fidelity are wrapping up. It looks similar, but one or two performance figures. Cripes, pension funds are about as transparent as a cup of cocoa.

[Alaric]

Firstly, is 8-10% of propery in a pension plan a reasonable idea to add some balance/diversify?

Sometimes commercial property does well, sometimes badly. You might expect rents and to correlate with RPI/CPI to an extent, giving you an index linker. Supposedly shopping chains are struggling at the moment which has a knock on effect eventually on those owning shopping space for rental.

Secondly regards the underlying "property funds", do they by and large aim to make as much £££ on rental income as they do any appreciation of the value of the properties that they invest in?

Both I would imagine, varying with the attitude of the managers. Speculative development may be more of signature of property companies operating as REITs. But REITs are diverse even inside their own sector.

[TheMotorcycleBoy]

Supposedly shopping chains are struggling at the moment which has a knock on effect eventually on those owning shopping space for rental.

Indeed.

But, presumably, if "shopping" becomes less high-street and more online, then vast amounts of space (property) is needed for the warehousing and the maintenance of distribution fleets?

We are from the eastern counties and driving around we see (typically near dual carriageways) lots of massive ugly box-shaped buildings i.e. the warehousing / distribution centres used for Amazon, Parcel Force etc.

So, I'm guessing that over the next 15 years these kind of places will continue to earn rents/lease-payments for their owners. Or is it the case, with those kind of firms the actual firm will own their warehouse/DC space outright?

Matt

[tacpot12]

Firstly, is 8-10% of propery in a pension plan a reasonable idea to add some balance/diversify?
Matt

Yes, it is a reasonable idea to have some property in a pension plan, but the time when this is most important is during retirement. During retirement, property provides an alternate flow of cash into your pension for you to draw on. Property yields tend to be unconnected to equity and bond yeilds, so if equity or bond yields go down, there is some chance that property yields will remain steady or go up. This effect will help avoid having to sell equities or bonds when they are falling in value to maintain your level of income.

During the accumlation phase of your pension, having commercial property in your portfolio is an optional extra. I had about 10% UK commercial property in my pension during the accumulation phase, and it produced a return very similar to UK Equities over 25 years or so, so I didn't really need or benefit from having this class of asset in my portfolio. But now that I am retired, I have 8% of my pension portfolio in commercial property funds. I also have about 35% of my retirement savings invested in residential property. This investment is outside of any formal pension tax wrapper; it is just a couple of properties I bought on my way to retirement that now produce an income (yield is just over 4%) and provide the prospect of future capital gain.


Hope this helps

[TheMotorcycleBoy]

Firstly, is 8-10% of propery in a pension plan a reasonable idea to add some balance/diversify?
Matt

Yes, it is a reasonable idea to have some property in a pension plan, but the time when this is most important is during retirement. During retirement, property provides an alternate flow of cash into your pension for you to draw on. Property yields tend to be unconnected to equity and bond yeilds, so if equity or bond yields go down, there is some chance that property yields will remain steady or go up. This effect will help avoid having to sell equities or bonds when they are falling in value to maintain your level of income.

During the accumlation phase of your pension, having commercial property in your portfolio is an optional extra. I had about 10% UK commercial property in my pension during the accumulation phase, and it produced a return very similar to UK Equities over 25 years or so, so I didn't really need or benefit from having this class of asset in my portfolio. But now that I am retired, I have 8% of my pension portfolio in commercial property funds. I also have about 35% of my retirement savings invested in residential property. This investment is outside of any formal pension tax wrapper; it is just a couple of properties I bought on my way to retirement that now produce an income (yield is just over 4%) and provide the prospect of future capital gain.


Hope this helps

Thanks Tacpot,

In the end I did add a very small portion of property to my overall scheme. IIRC it was about 6 or 8%. I.e. I just configured my fidelity "plan-viewer" allocation to include that percentage in the "FIDELITY L&G 70:30 HYBRID PROPERTY FUND - CLASS 9" fund.

I changed my allocations to be (about) 55% in equities funds, 10% in a global dividend fund, 8% in property, and the remainder in one of those "life-style" funds where a mixture of stocks+bonds+gilts+cash is used. The weighted averages of all the charges are about 0.31% per annum.

This was about the first time that I have ever actively changed the funds myself. About 8 years ago my pension adviser did (I've since removed him) in my private personal plan, and with my employer pension plans I've always just left it as is - i.e. in whatever default is offered.

However, now that I've merged all my schemes into my works DC/salary-sacrifice one, I thought I'd configure my own allocations, since the fidelity default one has been a little lame, even before the recent equity sell-offs. I've also increased my contribution to 7% of my gross salary (my employer puts in 4%)

I'm planning now not to really touch this thing again for another 10 years or so. (I'm 50 now).

Matt