Pension profit only 2.3% a year

xingxing1118

Recently, I checked my friends pension account. He contributed 46,000 Euro from 2005-2015 for 10years. And since then he didn't contribute any money. His current pension value was 71,000 Euro which is unbelievable.... Same as only 2.3% compound Interest rate value??

Anyone can provide the rate of average yearly return on your pension?

Peregrinus

Without knowing exactly how much was paid in each year it's impossible to calculate the average annual return.

Most people's pension contributions are a percentage of their salary, and their salary tends to go up a bit each year due to progression in seniority, the occasonal promotion and general pay increases, so their pension contributions go up with it. If we assume that this guy paid pension contrbutions of €3,660 in 2005 and then increased that by 5% each year, then after 10 years he would have paid in just over €46,000. If that had accumulated to €71,000 by 2024, my back-of-the envelope calculation suggests that that implies an average annual return of about 3.1%.

Which is better than 2.3% but still is, yeah, not great.

You don't say how your friend's pension fund was invested. Most pension funds offer a choice of investment options, some of which focus on providing a stable, but generally low, return, and some of which provide a more volatile, but generally higher return. People who have a horror of ever seeing their balance go down will tend to tend to go for the more stable, cautious options. In the long run they pay for this by accepting limited returns — they don't get much more than if they had put their money in the bank to earn interest.

One possible explanation for your friend's disappointing return is that his money was invested in a low-risk, low-return fund like this.

Another possiblity is that your friend's pension fund was invested in a high return, but volatile, fund, and the €71,000 valuation was made at a point just after the fund had taken a dive. Value it again in 6 or 12 months' time and it might be a very different story.

Yet a third possibility is that his returns have been kept low by high management charges imposed by the fund manager.

It's certainly worth your friend's while to investigate this; there may well be things he can do that will improve the returns he is earning. But there isn't enough information in the OP to say what those things might be.

lau1247

He might have 46K invested over 2005-2015 but between 2005 to now, few things had happened such as 2008 financial crisis and Covid for example. So a good chunk of it may be wiped off and had to be built back up over time.

893bet

Seen this in my own pension also. Pitiful growth. Despite stock markets being all time highs.

Jim2007

https://www.boards.ie/discussion/2058370525/pension-profit-only-2-3-a-year

If you are going to start reviewing other people's pension funds and commenting on it, then you are also going to have to learn how to do it and this is not the way.

To start with you need to know the annualised return on the pension, not some figure you made up yourself, next you need to understand the the fund rate of return may be very different to the individual's return rate because of timing and personal asset allocations. So you need to know a lot more information before you can comment on performance.

Likewise, comparing the return rates on random pensions is also meaningless because again you have no idea of what was going on in those funds or with those individuals.

So before going on you need to bring a lot more information to the table in order to get a meaningful response.

Jim2007

We seem to have the same discussion every few months….

So to be clear, you can't make a meaningful performance assessment of a fund against anything but it's benchmark or a fund using the same benchmark. And you can't make a meaningful performance assessment for an individual invested in that fund through a pension without constructing a composite benchmark for that pension.

So statements like my pension only did 3.1% while the STOXX 50 did 12% is meaningless! Because no pension fund is going to have that as on objective, it would almost certainly be too risky for the profile of most people invested in the pension never mind being barred by law.

xingxing1118

II didn't do detailed calculation I just checked how much and how long he has contributed and how much current pension value is, so 2.3% average return was just rough calculation result...

But You are right, probably his return is 3.1% which is stil unacceptable return. If he bought physical gold since 2005 to 2010,his 46k would become around 250k today.

1% of pension management cost is killing pension value, If I buy 500k gold in safe box I only need pay 300-500 Euro safe box charge but with pension I need pay €5000 Euro a year. And gold average yearly return for long term is roughly 8-10%.

I contributed some pension in the past few years but wasn't happy with it specially after checked my friends 19years pension result....

I Hope anyone who has 6-8% average return with his pension can message me to proof that my friend case(3.1% average return )is an exceptional case.

Even though we can get 40% tax refund at the beginning but with 1% management charge for the long term it's not worth to contribute to pension if most pension average return is 3-4%??

xingxing1118

Your approach is good, I was wondering how much average return for pension in most cases, I hope my friend case is exceptional case and he probably contributed to the most safe fund, that's why his Current pension value is only 71k. Anyway he used to working at well established company in Ireland so his financial provider supposed to very good.

I have some money sitting on my company account but afraid to contribute it to pension as once I contributed I can't withdraw it till retirement age and was shocked with my friends pension return.

greyday

The high risk funds when you are young is the advise I received when leaving a previous company 12 year ago, I followed that advice and 51k with no more contributed since than has grown to 126k, the fund was fully invested in stock markets.

xingxing1118

7.85% average return, this is good so far.

SteelyDanJalapeno

https://www.boards.ie/discussion/comment/122655643#Comment_122655643

One big difference here if you buy gold, is you've paid tax on the 500k initially (split higher and lower band, let's say 30%) and you'll pay capital gains on any increases it makes of 33%.

If you're on the higher rate of tax in Ireland, you nearly need to include the tax avoidance gains as a part of your % roi

Jim2007

https://www.boards.ie/discussion/comment/122655643#Comment_122655643

You did not do a detailed calculation because you can't as you have neither the knowledge nor the data to do it. Your understanding of the calculations, the risks and pension management is fundamentally flawed and as a result your conclusions are just plain wrong.

The expected annualised return on pension funds in Europe is about 2% -3%, I'm telling you that as someone who has been doing performance and attribution for over three decades. And this should not be at all surprising because very very few funds can consistently out perform the economies they are invested in over the long haul, yes some funds will out perform are certain periods depending on their investing objective, such as lifestyle funds in the early years, but no over all.

I've no doubt you'll find pension funds with higher rates of return today, but in say 30 - 40 years time when it time to take the money out - the annualised return with be 2% - 3%.

McCrack

https://www.boards.ie/discussion/comment/122655527#Comment_122655527

Such a lecturing and condescending tone off this

Jim2007

https://www.boards.ie/discussion/comment/122656676#Comment_122656676

Personal finance is a very serious business, mistakes made with pensions and long term savings can be live changing and unfortunately many people rely on the internet for this type of thing. So yes it is my intention to be blunt so that anyone else reading it is under no illusion - this is not the way.

Peregrinus

But You are right, probably his return is 3.1% which is stil unacceptable return. If he bought physical gold since 2005 to 2010,his 46k would become around 250k today.

That crucially depends on exactly when he bought the gold. Over the the ten years after 2005 the price of gold flucuated wildely. Contrary to popular belief, gold is a highly volatile asset. If it is the case that your friend choose to invest in the stable, conservative fund, then its very unlikely that the alternative of investing in gold, even if it had been available to him, wouild have been consistent with his investment objectives.

Shauna677

https://www.boards.ie/discussion/comment/122655710#Comment_122655710

that's the way to go.

coylemj

OP, there is a fundamental flaw in your maths.

Your quoted return of 2.3% p.a. is based on a lump sum investment of 46K in 2005 now being worth 71K i.e. a ROI of 54% over 19 years. But your friend didn't invest 46K in 2005, his money was invested over a 10 year period, up to 2015. If we do a crude calculation based on the midpoint (14 years), the return is 3.15%. Which tallies with Peregrinus' 'back of the envelope' calculation of 3.1% in post #2 above.

It still doesn't seem like a great return but that is almost certainly down to his choice of fund. Any fund which was skewed towards equities would have achieved a far better return over the past 9 years. Zurich's Prisma 4 fund which has 44% invested in equities achieved an annualised return of 6.6% p.a. over the past 10 years. And that is not their most aggressive fund.

xingxing1118

Your answer is what I want. Yes, I am not familiar with pensions. I met six financial advisor these years. The information they conveyed to me was that the overall return of pensions is about 5-6%, but I never believed it. So I checked my friend’s pension account with his permission.(I checked his pension account two years ago as well)

I wanted to confirm whether my guess of an average pension return -2-3.5% was correct.
And management cost is unbelievable for the long term.

You have been in this industry for many years, and you actually said that the average pension return in Europe is 2-3% (of course only for long-term, such as 30 years), that should be it. I believe it depends on the time period of investment and the type of fund chosen, but generally speaking, the return in 30 years is 2%- 3.5%.It’s make sense for me. I am happy to get this information.

halkar

I think pension providers have set numbers for their low, medium, high risk chosen by their clients. Probably something like around 2.5, 5 and 7.5% give or take 1 - 2% . Even if they make 50% out of your money they will give peanuts back. Better invest some of it yourself.

xingxing1118

I accumulated gold since 2010 and I only need to pay €250 a year for safe box fee. I am also under self-managed pension and they are charged - 1.8% of my pension value. I can reduce my pension cost to 1%, if I contribute over 200k. but I am not happy even with 1% pension cost. The pension charge increases same speed as your pension value grows. I am trying to never sell my gold to avoid capital gain tax. Pension charge is more than 40% tax refund value

greyday

Depending if you self manage or not, the costs vary considerably, I self manage and I am charged 0.18% and 0.14% on the funds I chose to invest in.

Over the last 10 years, one fund lost 22% and the other 28% in a bad year, they made that back in next 18 months, that's the type of volatility you need to stomach if you go with the higher risk funds.