When you get that little envelope and you know it’s about your pension, that’s the question you’ll be asking. Typically – you won’t get much of an answer from your pension illustration -even if it is the new type pioneered by Ruston and Quietroom.
What illustrations are designed to do is tell you how far you’ve got towards your destination and you can bet a pound to a dollar that it’s not far enough. The impact of a pension illustration should be to get you reaching for your bank details to shove more money the provider’s way.
But what you won’t get is a sense of how your money’s worked for you, let alone whether you could do better elsewhere. In terms of messaging it’s
- stick with us
- give us more money.
Which is not what we opened the envelope for
Now a bit to think about..
Every time you’ve given your pension some money or your employer’s given some money on your behalf – you’ve “made a contribution”. A contribution buys you rights to your money back in the future, and your rights are stored in something – rather prosaically called “units”. Every unit your contributions buy have a price and that price changes every day. If you plot the price of your units day after day, you can get a unit price history which might look this (if you’re lucky)
or like this – if you aren’t
But this means nothing to me (oh Vienna!)
We don’t get to know about what’s happened to the money through charts of unit price histories.
We need something to make this real
When you buy units, the clock starts and it ticks to the day you sell those units. You and your boss could make hundreds of unit purchases and each those purchases has its own unit price history.
If you put all those unit price histories together you get one big unit price history – that is unique to you.
Guess what – it’s how you’ve done!
We can express how you’ve done as a percentage and call it an internal rate of return. But knowing your “real IRR” is 7.01% isn’t going to help you much. You want better than that.
You might be interested to know, that to calculate how you’d have done – whoever’s calculating has to also work out how many units have been sold and at what price.
You could work out a theoretical IRR without the money taken out. We can call this a gross IRR, if your IRR is 7.01 and your gross IRR is 8.01, then your ongoing charges are 1% pa.
Comparing your Gross IRR (the value interest) with your real IRR (the net interest), you can go a stage further and create a value for money score. The value for money score can give you two pieces of information “value” and “money” mixed together.
And now we’ve got a value for money score which is unique to how you’ve done!
That 76 score is based on how your VFM compares to other policies, all of which have a VFM score, and the more VFM scores out there – the more relevant that number becomes.
That number tells you how you’ve done relative to everyone else – and now we’re rally talking.
Wouldn’t it be great if every illustration had an AgeWage value for money score on it?