You Can Go Your Own Way

As Fleetwood Mac famously sang ... ‘you can go your own way’.

And the same applies with your workplace pension scheme.

I know, I know... it's a tenuous link, but bear with me on this...

Recent changes outlined by our tax lord and pension ruler Jeremy Hunt ?? will have a consequential impact on everyday pension savers like you and I.

In his recent mansion house reforms (mansion huh? - just ignore, nothing to do with mansions!) Chancellor Jez Hunt outlined some pretty fundamental changes to the setup of our pensions; alterations that could possibly have a massive impact on your workplace pension scheme and potentially compromise your long term planning.

?? Just want the Headsup?

Various big pension players (household names such as Scottish Widows and Legal & General) have partnered with Jeremy and his cronies to allocate 5% of their default pension fund capital to invest in unlisted UK companies.

Jez is boasting that this will consequently boost your pension pot when you retire, but be wary of this promise; it's a self-serving move aimed at solving government problems and certainly not one for your benefit.

Luckily however, you can escape these changes and avoid them affecting you at all.

It's as simple as taking the time to review the fund that your workplace pension is invested in and steering well clear of any default fund options caught by Jez's dangerous and costly net.

Backup, backup. So what's happening here?

The problem that Jez is trying to solve originates from the UK’s ongoing struggle to attract start-ups to remain in the UK.

Today's start-ups could be the multinationals of tomorrow.

And the UK government are understandably keen to keep them this side of the Atlantic.

Happy, growing companies = happy, growing taxes for the government.

That part I get. Taxes are good for the economy and a healthy company will bring employment opportunities. Winner winner.

What I don't agree with is enlisting everyday pension savers (against their will or better judgement) to fund this government agenda.

The UK stock market has for some time now been distinctly out of fashion, with small companies opting to list their shares on overseas markets ??

Jez and his friends have drafted agreements with 9 of the UK's largest pension providers (with more likely to follow) for each to invest 5% of their 'default' fund capital into these unlisted companies.

The issue is clear.

How do you feel about 5% of your pension fund being invested in very high risk, very costly, UK domestically concentrated companies?!

What does this mean for you and your pension? ????

When you join a new workplace pension scheme you'll be enrolled into a default pension fund.

You'll likely still be in this default pension fund if any of the following resonate with you:

?? you haven’t actively chosen another fund yourself

?? you've just 'gone with the flow' when you joined your workplace pension and can't recall picking any fund whatsoever

?? you've just accepted whatever the automatic choice was

?? you've gone with whichever fund your employer placed you into when you started your new job

Why worry ?? ?

Some questions you should be asking yourself:

1?? Are you happy with 5% of your pension fund investment allocation being invested in typically high risk assets?

Is this sensible for your financial life plan?

These are fledgling companies, with a much higher risk of default.

You may not have the risk stomach to weather such volatility.

Conversely, perhaps you can stomach greater levels of risk than this and a 5% allocation may not be enough.

Perhaps you need a higher unlisted equity exposure.

Or a greater UK concentration.

This comes down to you.

Your situation.

And your goals.

Default pension funds are a troubling one size fits all.

In personal finance, one size rarely fits all.

2?? Investing in private equity often attracts higher ongoing fees to cover the fund's costs of research and ongoing management. Investing in these unlisted companies is akin to venture capital investing and often brings initial fees of 2% and an eye watering 20% performance fee! Ouch.

These higher fees will be passed on by the pension fund manager to you and your pension fund.

Investment returns are an uncertainty.

Fees are a certainty.

These higher fees will drag the long term returns in your pension.

3?? Is a 5% allocation to high risk UK equity sensible for you?

Will this mean your pension is now overly concentrated in the UK?

How do you feel about that?

What are your views on the UK economic picture?

Until now you may have had very little UK unlisted equity exposure, and all of a sudden hey you're up at 5%.

5% may not sound like much, but always remember:

Diversification is ???

4?? The government has made ludicrous, unfounded claims that these changes will:

‘increase a typical earner’s pension pot by 12% over the course of their career’.

This is nothing but a dangerous overpromise.

Our industry doesn’t do guarantees, no matter how much easier this would make my job!

In fact the FCA regulates heavily against it.

Financial promotions and over-promising are big no-no's.

It's funny and worrying that Jez can make such bold claims with nothing to back it up.

It's a hook to pull you in.

What you should do ?

Good news. You don't have to go with the flow and continue with the pension fund you joined automatically.

You don't have to absorb these worrying changes outlined by Jeremy Hunt.

Default pension funds were never the best plan when it came to long term financial planning in your workplace pension.

And this is true more so now than ever before.

Take some time to review which fund you're invested in to make sure it's suited to you and not the government.

Go your own way in your pension.

Future you will thank you.

Benjamin