The days when a balanced managed fund could be used as an automatic default for a personal pension plan – an automatic solution to the ‘average’ client’s risk profile and objectives – are long gone.

More importantly for the personal pension holder who has an ‘old style pension contract’ when they receive the annual statement from their product provider which shows how much their fund at retirement will be worth even if it grows at 7% a year compound, the figure is really frightening. The first thought that may come to their mind is they will never be able to achieve a First Class Retirement.

Where is the problem?

Before the introduction of stakeholder pensions in 2001, most personal pensions had a number of charges that were applied to the contributions paid and the value of the plan.

What are these charges? It could be:

• Monthly policy fee of a couple of pounds which might increase each year in line with inflation.

• Each contribution paid into the plan might also be subject to some kind of initial charge, for example, a bid/offer spread with units purchased at one price, known as the offer price, but valued at a lower price, known as the bid price to calculate the value of the plan. The bid/offer spread might usually be 5 per cent.

• The first couple of years of contributions or any contribution increase might also be subject to something called a capital unit charge in the form of an additional management charge. Additional because each of your selected investment funds might also have an annual management charge of between 0.5% and 1.5% depending on the nature of the investment funds. Capital units might impose an additional annual management charge of, say, 3.5 per cent a year.

• Each contribution paid might have a further charge deducted where the amount allocated to investment units was less than 100 per cent. Conversely, where the allocation rate was greater than 100 per cent, this would have the effect of reducing the charges levied against the contributions.

• The fund in question might have been closed by the life company for new business. The fund may have been closed because the fund manager cannot attract enough new customers or do not make a large enough profit on any new policies sold. Others might close because they are being taken over by another company. In some cases closed funds switch from investing in riskier assets such as shares, which tend to produce good returns in the long-term, to investing in fixed interest assets such as gilts and bonds, which tend to have lower but more predictable returns. This means that in the long term the value of your fund may not be as high as you expected.

• Retiring before the selected benefit age on your plan or transferring away from the plan might also result in a further charge, effectively bringing forward the future management charges that would have been paid had you kept your plan with the product provider.

As can be seen from the above it is quite possible that in the most extreme of circumstances, it is even possible that the future charges might completely erode the value of the plan.

Anybody who has purchased a similar plan some years ago and the charging structure was set within the policy documentation, the product provider could argue that it is doing nothing wrong.

One example that we have come across

A client who came to see us had a personal pension plan with a reputable life insurance company.

She commenced the plan in February of 1999 and the total contributions made until September 2008 was £28,727.00.

The fund valuation as at September 2008 was £30,232.00.

After paying into the plan for 9 years and 7 months the fund had only increased by £1,505.00.

The Solution

Any pension plan holder with old style charging structure should definitely consider switching into a product where charges are transparent, the fund choice is enormous enabling them to mix and match in line with their risk profile, provide full control and flexibility with online monitoring and rebalancing facility 24/7,maximizing the investment potential.

Do you have Self Invested Personal Pension (SIPP)?

SIPP is a personal pension which gives greater choice and control over where an individual can invest their pension monies hence many people have joined the band wagon.

When we looked at some SIPP cases we noticed that although a wide range of asset allocations are permitted within SIPP, due to lack of expertise and/or fear of stock market volatility, many people had invested the major chunk of their holdings in cash or money market funds.

Whilst we can understand the dilemma, what these SIPP investors were forgetting is in the long term the growth from the cash and money market funds will be very low which will affect the final value of the funds at the time of retirement. Whilst it is sensible to keep some investment within cash and near cash defensive stocks, we believe the larger part of the fund must be invested as widely and within different risk profiles in order to increase the fund value in the medium to long term.

For those people who have a large part of their money within cash or money market funds, we believe although these people may already have a first class product, unfortunately they may end up receiving third class retirement pension.

If you do have a SIPP and needs to boost the investment growth please do talk to us. You do not need to change the SIPP provider.

If you have at least 10 to 15 years to go before retirement, than acting now and taking things under control may bring you a First Class Retirement Pension.

We can only advise on Money Purchase – final fund value linked – Pension Schemes. We can look at active as well as frozen schemes.

If you are worried about the falling value of your pension fund, contact us immediately. Do not leave it to the last minute.

WEALTH WARNING:
All types of investments involve risk. Our guided service allows you to benefit from the vast diversity of products and provides you with complete control and flexibility. Therefore when selecting any investment/s, key features documents should be read as this will provide all relevant risk factors involved. Past performance is not necessarily a guide to future returns. January 2010.