The Lemon Fool

When I retire, I will be drawing on multiple income streams. Hence, I have my own spreadsheet that attempts to predict what I will have then.

I recently received a letter from my pension provider with their prediction of what that component would be. There was a significant difference in our predictions.

Ok, possibly my growth predictions may be a bit ambitious, but I wondered what real rate of return they were using.

I started plugging guesses into the FV calculation and was quite surprised. They predict the real rate of return to be a negative 1.2% ! I.E returns of less than inflation.

I suspect that the regulator sets a formula rather than basing it upon any consideration of investments.

Urbandreamer wrote:Ok, possibly my growth predictions may be a bit ambitious, but I wondered what real rate of return they were using.
.

Have you asked them?


Adrian

Sounds about correct for Dowagers from the Caledonii and the Sagacious company. IME of course - hence my move to SIPPS.

Urbandreamer wrote:When I retire, I will be drawing on multiple income streams. Hence, I have my own spreadsheet that attempts to predict what I will have then.

I recently received a letter from my pension provider with their prediction of what that component would be. There was a significant difference in our predictions.

Ok, possibly my growth predictions may be a bit ambitious, but I wondered what real rate of return they were using.

I started plugging guesses into the FV calculation and was quite surprised. They predict the real rate of return to be a negative 1.2% ! I.E returns of less than inflation.

I suspect that the regulator sets a formula rather than basing it upon any consideration of investments.

They’re probably using gilt yields.

Spet0789 wrote:They’re probably using gilt yields.

That's what I thought, although the letter claimed that their assumptions were based upon what I was invested in (international, UK & Percific rim, trackers) and assuming that contributions increased by 2.5% per year due to wage increases (I should wish). Despite that we have a negative rate of return (in today's money as they claim).

The title of the thread is "Amusing pension prediction". Past performance is VERY different from their prediction, though I did lose a small amount of money last year. In 7 years the pot has increased to 1.65 times contributions.

Without a LOT of information it is impossible to work out a rate of return and anyway it should be expected to be quite lumpy. My method is based upon the idea that I invested the total amount 7 years ago and to calculate a growth rate. It should lead to a conservative estimate of past performance from which I subtract inflation. Crude, but I defy someone to argue (with evidence) that other methods provide results that have more confidence (in the mathematical sense).

Regarding SIPP's, yes I have one and despite common sense do contribute to it. If I were to instead use the funds to contribute to this pension the uplift due to the fact that it is a salary sacrifice scheme would instantly produce better performance. I contribute to my SIPP because I enjoy picking risky investments and a SIPP is not a bad choice if you want to do that.

As regards costs, it's not quoted as a percentage in the letter, but it's 0.5% of the pot (which I believe to be how they charge).

PS. I'm not looking for advice, recomendations or comments about my actions. I was simply seeking to amuse and it seemed relivent to this board. I should also comment that I'm over 55 and, as I implied in the OP, have other investments.

There are some (google hussman) who think that at current valuations stock market returns will be negative over the next 10 to 12 years. Capital gearing, personal assets, ruffed and other “permanent bears” lean toward this pessimism. I tend to agree and hold 20% cash. Trouble is I went 20% cash two years ago.

Hey ho, that’l teach Me not be a dirty little market timer....

toofast2live wrote:There are some (google hussman) who think that at current valuations stock market returns will be negative over the next 10 to 12 years. Capital gearing, personal assets, ruffed and other “permanent bears” lean toward this pessimism. I tend to agree and hold 20% cash. Trouble is I went 20% cash two years ago.

Hey ho, that’l teach Me not be a dirty little market timer....

That sounds like a good reason not to be buying index funds then.

Dod

Dod101 wrote:

toofast2live wrote:There are some (google hussman) who think that at current valuations stock market returns will be negative over the next 10 to 12 years. Capital gearing, personal assets, ruffed and other “permanent bears” lean toward this pessimism. I tend to agree and hold 20% cash. Trouble is I went 20% cash two years ago.

Hey ho, that’l teach Me not be a dirty little market timer....

That sounds like a good reason not to be buying index funds then.

Dod

Yes, because everybody knows actively managed funds don't lose money when markets fall

hiriskpaul wrote:Yes, because everybody knows actively managed funds don't lose money when markets fall

Ah so, as the Japanese would say. Still a good reason not to buy index funds it would seem. I favour individual shares. I was not thinking of funds of any sort. Of course one may not believe the proposition anyway.

Dod

Dod101 wrote:

hiriskpaul wrote:Yes, because everybody knows actively managed funds don't lose money when markets fall

Ah so, as the Japanese would say. Still a good reason not to buy index funds it would seem. I favour individual shares. I was not thinking of funds of any sort. Of course one may not believe the proposition anyway.

Dod

Yes even better, buy individual shares. They will not drop in price when the market does either.

hiriskpaul wrote:Yes even better, buy individual shares. They will not drop in price when the market does either.

I do not like cynicism very much, but to be serious the fact is if the market is negative for the next 10 to 12 years (based apparently on current valuations) then buying an index fund is guaranteeing a loss. Not all individual shares will be negative even if the market in general is and so I reckon that it will improve my chances of a positive return if I buy/hold individual shares. At least I will be removing the guarantee of negative returns.

I do not see the UK marker as over valued anyway, and so I question the whole proposition.

Dod

Ok, now I understand. Just buy the shares that do better than the market. Simple really.

I am sorry, I dodn't mean to re-ignite the passive active debate.

For my own part I use both. I also "time" the market. IF it becomes clear that we are entering a serious bear market, then yes I will change my investment statergy. That IS timing the market. Sure I'll be late, late out and late back in. However we are not required to maintain our views through thick and thin. Or for that matter be consistant. My group pension is invested index trackers, my SIPP in individual companies and active funds.

TBH this thread is more about the difficulty in predicting future returns than choosing a method of investing.

Urbandreamer wrote:Without a LOT of information it is impossible to work out a rate of return and anyway it should be expected to be quite lumpy. My method is based upon the idea that I invested the total amount 7 years ago and to calculate a growth rate. It should lead to a conservative estimate of past performance from which I subtract inflation. Crude, but I defy someone to argue (with evidence) that other methods provide results that have more confidence (in the mathematical sense).

The mathematics of working out what regular investments would grow to with a known growth rate is well known, and not that complicated. It's based on the sum of a geometric series. There are plenty of online calculators for the compound interest on regular savings, or you can easily write a formula to use in a spreadsheet. If you have been contributing regularly, then an assumption that the entire amount was invested in one go will look rather inaccurate.

I think the simple way to reckon compound interest is to assume your contributions stay in line with inflation, and then to use a growth rate that allows for inflation - eg if you expect 5% growth and 1.5% inflation, then put 3.5% into the formula. That will then give you the final amount in terms of today's money. If there's a regular charge on the whole amount, then subtract that from the growth figure too.

The O.P. could discover far more amusement than his primary projection of -1.2%, simply by entering the world of KID's (Key Information Documents). The publications that purchasers of investment funds are now enticed to read. A trip from Harry Worth to Little Britain as it were.

Quite what variables are contained within the regulators algorithm are unknown to me, perhaps x = the end of the world and y is to be randomly assigned by the reader.

Take for example Personal Assets Trust, a dour Scottish institution that has the temerity to hold a third of assets in equities, a hoarder of gold bars and accumulator of US government TIPS. A deflationary/inflationary time bomb is confidently predicted to provide a return of up to 14.47% over the next 12 months.

Or Woodford's Patient Capital Trust. A possibly more predictable 44.25% loss over the coming 12 months. Clearly there must be some residual value in access to cold fusion technology with in the new landscape.

Dod101 wrote:

hiriskpaul wrote:Yes even better, buy individual shares. They will not drop in price when the market does either.

I do not like cynicism very much, but to be serious the fact is if the market is negative for the next 10 to 12 years (based apparently on current valuations) then buying an index fund is guaranteeing a loss. Not all individual shares will be negative even if the market in general is and so I reckon that it will improve my chances of a positive return if I buy/hold individual shares. At least I will be removing the guarantee of negative returns.

I do not see the UK marker as over valued anyway, and so I question the whole proposition.

Dod

Have you thought about the maths of a negative total return for UK equities over 10 years when the current dividend yield for the asset class is over 4%? Assuming dividends did not grow at all and were just maintained and reinvested the capital value could halve and you would still end up roughly level.

Despite 2 hot wars, one cold war and various Labour governments equities have outperformed cash in 98% of 10 year periods over the last 120 years. Their average annual real return has been 5.1% according to Barclays in 2017.

OhNoNotimAgain wrote:
Have you thought about the maths of a negative total return for UK equities over 10 years when the current dividend yield for the asset class is over 4%? Assuming dividends did not grow at all and were just maintained and reinvested the capital value could halve and you would still end up roughly level.

Despite 2 hot wars, one cold war and various Labour governments equities have outperformed cash in 98% of 10 year periods over the last 120 years. Their average annual real return has been 5.1% according to Barclays in 2017.

Well the OP was quoting real return rather than nominal. Looking at the 2016 Barclays Equities Gilts Study, the latest one I have, since 1945 there were 9 out of 61 rolling 10 year periods which produced negative total real returns, so the chance of seeing a negative 10 year real return from equities is not negligible. However, these are ex posts returns rather than expected returns and a projected negative return does seem a little odd, not sure I would call it amusing though! If I was being quoted that I would want to make absolutely sure that all the charges were being fully disclosed. Something does not smell right here, but it could be their assumptions are based on the pension pot being moved to short dated gilts/bills as retirement date looms, together with charges.

hiriskpaul wrote:Well the OP was quoting real return rather than nominal. Looking at the 2016 Barclays Equities Gilts Study, the latest one I have, since 1945 there were 9 out of 61 rolling 10 year periods which produced negative total real returns, so the chance of seeing a negative 10 year real return from equities is not negligible. However, these are ex posts returns rather than expected returns and a projected negative return does seem a little odd, not sure I would call it amusing though! If I was being quoted that I would want to make absolutely sure that all the charges were being fully disclosed. Something does not smell right here, but it could be their assumptions are based on the pension pot being moved to short dated gilts/bills as retirement date looms, together with charges.

Indeed.

Calculating exact historic returns, given changes in contributions and a lack of historc data, is simply not possible. However If I assume that I contributed everything as a lump sum 7 years ago (possible as it did start with a large transfer) and do the calculations of the current value then the historic compound return is about 7% (which is what my other portfolios make). Clearly a proper calculation would indicate a greater return, however it's good enough for a rule of thumb. From that I am subrtacting 2% to account for inflation as an idea of "real" past returns. I don't expect future returns to be that high though. I'm assuming a future real return of 4%, on the assumption that income is reinvested.

The charges do seem clear enough, or at any rate significantly clearer than how they made their prediction. Higher than my SIPP, however contributions benefit significantly from the fact that it's a salary sacrifice scheme.

As you say, the risk of a negative return over the next ten years is not zero. However I really think that they are being too conservative (arriving at a negative return), even given that they assume that in 4 years time they shall start to gradually move into fixed interest investments. In fact that is not what is going to happen, as I can choose from a large selection of funds and do my own "lifestyling" as I wish. I fully intend to continue holding a percentage of equitys well into retirement rather than be 100% cash equivelant at retirement.

hiriskpaul wrote:Ok, now I understand. Just buy the shares that do better than the market. Simple really.

Crikey! You should patent that one quickly, IMO.

Urbandreamer wrote:Regarding SIPP's, yes I have one and despite common sense do contribute to it. If I were to instead use the funds to contribute to this pension the uplift due to the fact that it is a salary sacrifice scheme would instantly produce better performance. I contribute to my SIPP because I enjoy picking risky investments and a SIPP is not a bad choice if you want to do that.

It may work out better if you make higher contributions to your workplace pension via salary sacrifice and then do a partial transfer from there to your SIPP. In many cases this transfer is free of charge and takes about a week.