Coming clean on opting out

Ok, so I haven't been entirely open in this blog since its inception, but something has changed which means I need to.

I think I wrote earlier about opting out from the state second pension.  Why?  In my (little) capito-anarchist world letting government do anything is a bad idea, so if you can get money out and manage yourself you should.  The ability to opt out (contract out) stopped this year, but has impacted my pension. 

Basically the way it worked is this: rather than the second pension pot being managed by the Government, it went into a separate account linked to your main pension.  However, Hargreaves Lansdown emailed me the other day to say the accounts no longer have to be separate - so the money has been transferred to my main account.

Wondering what I did with it?  I played the passive tracker game.  A passive tracker does as it sounds - it copies an index in as exact a way as possible, and because it is passive i.e. there is little human decision making, it is cheap cheap cheap from an annual management charge perspective.  It is a bit crappy insofar as when a stock gets more expensive the fund buys more of it (so you have the tendency to buy on the up and sell on the down), but the cheapness plus dividends should far outweigh this.

I put all the money in my state second pension account into the cheapest FTSE All Share tracker offered by Hargreaves Lansdown, which is the SWIP FTSE All Share Index Accumulation tracker.  What are its statistics, you ask?  The total expense ratio is 0.11% - compared to 1.6% on active funds.  To illustrate what that means, if you assume growth of 5% per annum gross, after 10 years, on £1000 the SWIP fund will equal £1612 - whereas the active fund will equal £1397 - so you are already 13.6% worse off.   Extrapolate that over a 40 year working life and it's even worse - £6751 vs £3809.  


Any downsides?  Well, yes there is (through Hargreaves Lansdown at least) - a £2 per month "platform" fee to cover the loss of the kickback that are usually paid to brokers on active funds that aren't received on passive funds.  I can honestly say I don't begrudge them that at all.  


How's it performing?  Well I bought into it on the 14 December last year and it's up by 8.9% since then - although that does include dividend income being reinvested.   Not bad, and in line with the rest of my investment strategy - once I am in I am in - so I am sticking with it.