Money: Planning did not pay off

Financial file: Paula Charlton wanted to provide a secure future for herself and her son
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Name: Paula Charlton

Date of birth: 20-09-1963

Occupation: Graphic artist

Background: Paula lives in London with her partner, Martin, with whom she has a young son, Jackson.

Paula, who earns pounds 33,000, has life cover worth four times salary on death through her employer. She also has generous private health insurance options should she be forced to stop work permanently. Paula has the option of joining a company pension scheme but on the advice of an insurance salesman many years ago set up a personal pension instead with a company called Merchant Investors. She has steadily increased contributions into the scheme as her earnings have risen and now pays pounds 2,080 gross into four separate plans with the same company.

In addition, she also has an old rebate-only pension with a firm called Provident Mutual, now part of General Accident, from when she opted out of her state earnings-related pension, plus a new scheme with Lincoln National, into which her employers are paying a further 3 per cent of her salary which would otherwise be paid into her company scheme.

The problem: Paula is worried by the fact that the value of the funds she has built up over the past eight years appears to be less than the contributions she has paid in. She also wants to discuss how Jackson's long-term financial needs could be met if something happened to her.

The adviser: Roddy Kohn, principal of Kohn Cougar, a firm of independent financial advisers based in Bristol.

The advice: As you have a child and are not married the most important step for you is to make a will so that in the event of either of your deaths any issues of inheritance are properly resolved.

As an interim measure I suggest you obtain a cheap will from WH Smith and complete it until you and Martin get to see a solicitor. Next, you need to establish whether or not the term assurance policy that Martin has is written under trust for your benefit.

There are two other points you need to consider under the heading of protection. The first is critical illness insurance for both you and Martin. This type of policy pays a lump sum on diagnosis of a serious illness such as a heart attack, kidney failure, certain types of cancer and so on. In the event of such an illness occurring, both you and Martin could repay the capital outstanding on your mortgage and the surplus could be used for any other purpose.

You already have life cover through your work, but Martin does not. He should be considering a pounds 100,000 policy, ideally pounds 150,000. As you are not married, you should ensure that you have completed a death benefit nomination form so that your employer is in no doubt about whom the lump sum should be payable to on your death.

Then there is the matter of your pension. The reason for the seeming disparity between your contributions and the value of your pension to date lies in the way the company concerned, Merchant Investors, applies its charges. The company applies a very high setting-up charge, which in effect wipes out a large part of your first and second year's contributions. A large slice of this goes towards the commissions it paid its salesman.

The firm also levies monthly contributions fees, which collectively come to more than pounds 180 a year. In addition, there is a 5 per cent bid-offer spread, which means that the value of your contribution immediately depreciates by that amount - akin to buying a new car. Moreover, whenever you expressed a wish to increase contributions the company started a new pension plan for you, leading to a new round of setting-up charges being imposed.

Collectively, the monthly charges on all your plans are 8.79 per cent of your gross annual contributions.

The result of this charging structure is that while you have paid in some pounds 13,500 over the past eight years, the transfer value of your pension today is closer to pounds 11,500. The company has told you that you cannot expect to break even for up to 10 years.

I do not know what the original salesman or his compliance department were thinking at the time. But some thoughts strike me. One is that this is one of the most disadvantageous charging structures I have seen. The pension is inflexible and the heavy up-front fees very damaging. Your very desire to do the right thing by increasing contributions has been heavily penalised. Nor do I understand why the salesman did not simply advise you to join the company pension scheme whose charges are a fraction of what you are paying now.

Overall, I believe there may be grounds for a claim for compensation from the pension company.

We should also investigate the immediate possibility of transferring your pension into the occupational scheme and diverting all contributions back into it. There may be an argument about whether this should be done before the outcome of any complaint to the pension provider. I believe there may be an argument that you should mitigate your losses now, even as an investigation takes place.

Finally, you have told me that you feel you can set aside as much as pounds 500 per month towards a regular saving plan. This would fit in neatly with the pounds 6,000 annual limit applied to general PEPs. These plans are exempt from income tax and capital gains tax and over the long-term it makes sense to set up a scheme for yourself. You should also set aside pounds 2,500 in an instant access account for a rainy day.

The verdict: The best thing about Roddy's advice was having to fill in a detailed fact-find form, which made me look through my documents. Only then did I realise how bad my pension arrangements were. I'm deeply shocked and just couldn't believe it. The fact that your fund has to be there for 10 years just to make a profit seems outrageous. I feel there must be some recourse to this. The problem is that you begin to wonder: who can I trust? On the positive side, I have bought a will from WH Smith.

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