5 Things you need to know about your pension
And how to take control of investing for retirement
Let me tell you a something that will reframe personal finance for you.
I did a Masters in Finance at London Business School. It’s a post-experience degree aimed at seasoned professionals. To apply you need a certain level of experience in finance and there’s no beginner classes. You jump right into the meaty stuff with a high level of assumed knowledge. So high, that even the seasoned pros are left scrambling in the first semester to remember all the technical stuff they’ve forgotten about.
One of my study group partners was this guy who spent 15 years in wealth management. And when I asked him about how he manages his pension, he said to me:
“I just have a work one with Fidelity.”
And when I asked him what he did with his work one with Fidelity, he said:
“Good question, I think it’s in balanced fund allocation. You know, so it automatically rebalances when I’m close to retirement.”
This was a guy in his early 40s with easily another 2 decades before needing access to his pension.
A guy in his 40s that managed other people’s money for a living. Literally, his job was to help other people manage money effectively. Find ways to maximise returns. Manage risk and exposure. Diversify.
And his own life’s savings was in a work pension with Fidelity. In a balanced fund allocation. Holding unit trusts. (Mutual funds, for my North American friends.)
That was the last time I felt inadequate about my finances.
The 5 Things you need to know about your pension
It took me a while to learn to optimise my money. It was a bit like learning to drive a car. You need to pick up some theory, put in the hours to consolidate, and practice. What I share here is what I wish someone told me early on in my career.
1. You don’t need an employer or a job to set up a pension.
A pension is simply an account type that allows you to defer taxes to many decades into the future. Anyone can set one up. While it’s common for anyone in full time employment to have a pension set up by an employer, anyone can set one up directly.
If you’re a freelancer, artist, run a small business, work part time or don’t work regularly, you can still set up and manage your own pension account and get the tax advantages.
In fact, even if you have a workplace pension, you may want to set up a self direction pension anyway. They’re usually cheaper and they have infinitely more choice.
2. You can hold Amazon shares in your pension. Or Google. Or Netflix.
You can also hold gold and other precious metals. Forestry. Oil. Coffee. Real Estate. Data centres. And no, not just gold miners or oil producers — you can hold physical commodities.
To do this, you need to set up a self directed pension. In the US it’s called a Self-directed IRA (SDIRA). In the UK, it’s a Self Invested Pension Plan (SIPP). Every country has a version of this.
3. Holding ETFs and shares is cheaper than mutual funds or unit funds.
Most workplace pensions will limit you to unit trusts chargable as a % of assets held, usually between 1–2% per year. Publicly traded assets are usually charged a one off entry and exit fee, usually less than $10.
Let’s do the math on a $10,000 investment.
Unit trust holding S&P 500
- Entry/Exit fees: 0
- Fees per year: 1.5% of assets per year →$150 per year
- Total fees over 10 years: $1500
ETF holding S&P 500
- Entry / Exit fees: $10 each way
- Fees per year: 0
- Total fees over 10 years: $20 (1x buy, 1x sell)
Speaks for itself.
4. You can transfer funds between your pension accounts
If can transfer funds between workplace pensions. You can also transfer funds between a workplace pension and your own self directed pension.
If you’re still in active employment, you‘ll need to keep a portion of your funds in the workplace pension to keep receiving their contributions. But you should be able to keep a nominal amount and regularly transfer new funds into the account you use to manage investments.
5. A pension account isn’t always the best way to save for retirement
Pensions defer your tax liability. This means you save taxes today, to pay them when you retire.
But remember, funds grow. If you’re 30 years away from retirement, the value of the pot you’ll be taxed on will be dramatically higher than the cash invested upfront. In some situations you’re better off taking your salary normally, paying the associated tax, and investing it via a tax free savings account. That way you pay tax on the value at point of entry into the investment, which is relatively smaller, and not the lump sum after it’s grown at 10% p.a. compounded over 3 decades.
You can usually access the same investment vehicles in a pension as you can in a tax free account.
Final words
Learning to manage your money is a skill. Just like driving a car. Many people feel overwhelmed about manaving their investments, but that’s often because theyr’e coming at it cold. You wouldn’t get behind the wheel of a car without first learning some theory, applying it over time, and practicing.
How long did it take you to learn how to drive? 40 hours? 50? 60?
Investing is no different.
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