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Many Brits are going to be playing their accordions for pennies well into their old age if dire prophecies about the state of UK pension savings are any guide.

But there’s no need to pray for the invention of ever-lasting youth pills – not when you can employ compound interest to help you live the life of a wrinkly Reilly.

Barely got two brass wazoos to rub together? Then you need a pension option that won’t gouge you with high fees, and requires minimal outlay.

And this is where a cheap stakeholder pension can be a smashing solution.

Stakeholder pensions are a low cost way to start saving for retirement.

Why choose a cheap stakeholder pension?

With a stakeholder pension you can invest in a diversified portfolio for as little as £20. A £20 lump sum gets you started, after which you can:

  • Never pay in anything ever again, and die poor.
  • Pay in £20 or more on a weekly or monthly basis.
  • Pay in £20 or more whenever you feel like it.

Indeed, it’s almost too flexible from an iron-willed, saving disciplinarian’s viewpoint.

Stakes alive

Most summaries of stakeholder pensions talk about annual costs of 1.5% for the first 10 years and then 1% thereafter.

But you can do much better than that!

Discount broker Cavendish Online offers a very cheap stakeholder pension from Aviva for a one-off set-up fee of £35.

After that, you’ll just pay the annual management charge (AMC):

  • 0.55% AMC up to £49,999
  • 0.50% AMC up to £50 – 99,999
  • 0.45% AMC £100,000 +

Your contributions can then trickle into a diversified portfolio carved out of the 40 or so pension funds available, which includes a range of index trackers.

True, that’s small beans compared to the choice you get in most SIPPs. Then again, excessive choice is precisely the kind of overkill that sends many running for the hills. Most people are better off with a few decent choices that enable them to spread their risk across key asset classes and be done with it.

Stake charmer

The index trackers in the Aviva stakeholder pension enable you to rustle up a portfolio that includes the following asset classes:

Equities Bonds
UK UK Long Gilts
US UK Index Linked Gilts
Europe UK Corporate Bonds
Japan n/a
Pacific ex Japan n/a

UK Gilts and UK Property are also available, although not as trackers. As there is no additional charge, we can allow a bit of active fund management this time.

The obvious absentee is an emerging markets fund. There’s an ‘International Index Tracking fund’ available that is 10% in emerging markets.

You can find the fund factsheets by clicking through on the fund names here. Choose the Series 2 (S2 funds). Save the factsheets to your desktop as PDFs if they don’t work in the browser.

You can also check out Aviva pension funds on:

Morningstar > Life & Pension > L&P quick rank > Manager: Aviva Life & Pensions UK Limited.

Choose ‘Pension Funds’ instead of ‘All Funds’.

Switching and rebalancing between funds is free, or else you can keep things super simple by using an all-in-one mixed asset fund.

Stake eyes

Another advantage of a stakeholder is that the provider isn’t allowed to charge you an exit fee. So you can always move on to a better pension once you’re able to save more.

The Best Invest Select SIPP is the cheapest pension I’ve found for self-directed investors, but the minimum contributions will put it out of reach for some.

Remember that if you have access to a contribution-matching pension at work then you should probably take it, and all the free money that comes with it.

Otherwise, a cheap stakeholder pension is an excellent option if you’re poorer than a chimney sweep in a smokeless zone. There’s simply no other way you’ll get the same diversification for merely £20.

Take it steady,

The Accumulator

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Weekend reading

Some good reading for the weekend.

While blogging has turned out to be much harder than I expected when I set up Monevator in 2007, I am proud of what I have achieved so far.

Woody Allen once said “90% of success is just showing up”, so to that end I’m proud to be still blogging five years on!

I’m very proud of my co-blogger’s passive investing articles, which I think can fairly claim to be the best single repository of such information on the Internet for UK investors.

I’m also very pleased that as the world slid into financial meltdown, Monevator was reminding readers to look to the horizon, to remember their long-term goals, that people have been scared many times before, and that such times have tended to precede the best returns.

I wouldn’t be human if I wasn’t slightly pleased that three years on from the bear market low, I can point to a post of 11 March 2009, where I wrote:

The global stock markets have suffered their worse declines for several generations.

Ultimately, if you’re not trickling money into the markets at these levels then I think you might as well forget stock market investing altogether.

To be perfectly honest, the timing was lucky: I am certainly not The Messiah!

But then again, you make your own luck, and to that end I am proud of the various articles I wrote around that time (before and after the low) on the value of investing in bear markets.

New readers may not appreciate how contrary that view was in 2008 and 2009.

Horror stories attract readers of blogs just as surely as they sell newspapers. And while Monevator had relatively little traffic in 2008 and 2009, I’d regularly get into ding-dongs on the comment sections of other gloomy blogs who claimed investing in shares was dead.

These ill-informed writers have probably cost their readers a lot of money.

The Internet is full of voices, and it’s ever harder to stand out. No wonder so many websites scream wolf, and urge passing traffic to take shelter from a falling sky.

I only hope readers remember which blog was urging them to consider the very positive outlook for shares in 2009 – which blog suggested they think more about where the market would be in 2020 rather than in 2012.

To be clear, I did not claim shares would bounce back as hard and fast as they have done. I just knew for a stone-cold fact that the FTSE 100 at less than 4,000 was a far better buy than when it was approaching 7,000.

Falling share prices are your friend, especially if you’re buying long-term income.

Three years on, two posts of the week

Fun as it is to sing your own praises once in a while, two other websites have done a far better job than I think I could in celebrating the three-year birthday of the post-2009 bull market.

Every passive investor should read Canadian Couch Potato for a magnificently different take on the past three years:

“You were in a terrible car accident: you were hit by a bus,” the doctor says gently. “You’ve been in a coma.”

“How long?”

The doctor glances nervously at her colleagues. “A long time, I’m afraid.” She pauses again. “Three years.”

It takes a few seconds for this to sink in. Three years? Your mind is filled with just one urgent question. “I gotta know, Doc. Give it to me straight. How have the markets been doing?”

Genius stuff, and it just gets better from there.

As this excellent recap from The Motley Fool‘s Morgan Housel points out, rumours of the death of long-term investing back in 2009 were much exaggerated:

With the crash of 2008, and ensuing rebound, came a widespread belief — presented as almost axiomatic — that the practice of buy-and-hold investing was dead. More volatility allegedly meant investors could no longer just buy companies and wait indefinitely; you had to be able to get in and out to score good returns.

“When will Wall Street and the financial media admit it? Probably never,” Sy Harding wrote in Forbes. “But buy-and-hold as a strategy is dead and gone, if ever it was a viable strategy.”

But buy-and-hold only looks dead if you start investing when stocks are expensive. Yes, if you purchased stocks in 2000, when the S&P traded at 40 times earnings, you suffered a lost decade. That’s how investing works. […]

Buy-and-hold still works if you buy good companies at good prices. That has always been true; it’s just easy to forget during boom years. The higher valuations are when you begin investing, the lower your returns will be afterward. Nothing about the past few years has changed that.

If anything, the explosion of volatility has been a blessing for smart buy-and-hold investors, providing some of the best buying opportunities of the past century.

All of us – whether stock pickers, passive investors, or something in-between like me – need to realise that the past three years have been truly remarkable. In fact, we’re unlikely to see a similar three-year run again in our lifetime.

I loved investing in 2009 and 2010. Things will only get harder from here.

[continue reading…]

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The recent suggestion here that university is now too expensive to be the best option for many young people certainly struck a nerve.

According to new figures from the Office of National Statistics (ONS), it also seems to have hit the mark:

The ONS reports that, over the past decade, the percentage of recent graduates working in lower skilled jobs in the UK has risen from 26.7% in 2001 to around 35.9% in 2011.

Other interesting statistics:

  • The number of recent graduates has increased by around 41% over the past decade
  • The 2008/2009 recession took the greatest toll on the employment rate for recent graduates compared to all graduates and non-graduates.
  • Graduates with an arts degree earn the least at £12.06 per hour.
  • Those with a degree in medicine/dentistry earn the most at around £21.29 per hour.
  • Non-graduates earn around £8.92.
  • New graduates (those graduating within two years) have the highest unemployment rates.

Leaving higher education in the teeth of a recession is obviously not great for new graduates. Then again, it’s not exactly a bed of roses for those who skip university – but they at least also skip the high debt and foregone earnings that going to university now entails.

According to a recent article on graduate unemployment in The Guardian:

Graduates leaving university found it harder to get jobs in 2011 than students finishing A-level courses, as youth unemployment hit its highest level since the 1980s, official data shows.

In 2011, 20% of 18-year-olds who left school with A-levels were unemployed compared with 25% of 21-year-olds who left university with a degree, according to figures from the Office for National Statistics.

Graduate unemployment rates were almost on a par with those for people leaving school with just GCSEs, with 26% of 16-year-olds with these qualifications out of work.

Interestingly enough, after a bit of waffle from a union leader about the importance of higher education, the article notes that:

All of the UK’s “big four” accountancy firms, which between them recruit several thousand graduates each year, have established degree-equivalent school-leaver training programmes, including Ernst & Young which launches its programme in the autumn.

Stephen Isherwood, head of graduate recruitment at Ernst & Young, said […]:

“There is a sense that the mantra of the last few years that everything is about university is not necessarily right, and that A-level students should really be thinking about what they want to do and whether that means going to university, and making sure they get the best deal for themselves.”

Please read my original long discussion about the pros and cons of university – and the great comments from readers that followed – if you want to know more.

You can also download the full ONS release on graduate careers and their fortunes in the labour market.

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Weekend reading: Over the top, again

Weekend reading

Some good reads from around the Web.

I enjoyed Don’t be the dumb money by Allan Roth this week – not least because I’ve been slightly trimming my equity exposure in recent days, and it’s always good to be reminded why.

As Roth writes:

When stocks were surging through April of 2011, investors poured $38 billion into U.S. stock mutual funds during the first four months of the year — just in time for an ensuing five-month decline that nearly hit “bear” status. Investors subsequently pulled $179 billion out of stock funds — just in time to miss out on the recovery.

And now that stocks are hovering around that all-time high, can you guess what’s happening? Yes, for the first two weeks of February, investors have put nearly $5 billion back into stocks.

It seems one cannot repeat this message enough. Personally, I was buying heavily again when the FTSE went below 5,000 back in August. And happily, so were many Monevator readers, judging by your comments on my report at the time.

This house believes the best way for most people to invest is passively. That includes you and me most likely, though it will be years until we can know for sure.

But if you’re going to play in the murky waters of active investment, then whatever you do don’t follow the crowds in at the top and out at the bottom – unless you truly appreciate the hard work of City folk, and aspire to make them richer!

[continue reading…]

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