The giddy ride to the promised land of pensions
As the industry changes, savers should have more confidence in switching their funds
Sunday 22 October 2006
It's easy to get dizzy on the pensions merry-go-round as you struggle to put aside cash and find a half-decent fund to build up savings for retirement. This time, however, it's not individual savers who are in a spin but the industry itself.
The way that money saved into personal pensions is recorded by insurers is coming under a particularly harsh spotlight.
For years, providers have logged new pensions business pouring into the company on the corporate balance sheet - without taking into account any outflow. So those pension policies that have been cashed in by savers, switched to another provider or left idle aren't included in the books.
This practice has continued unchanged for "historic" reasons, according to the Association of British Insurers (ABI) - in other words, the sector has never got round to changing its ways. But the practice has now come under fire for being misleading.
A report from the life insurance and pensions consultant Higham Dunnett Shaw (HDS) warns there is a danger that insurers' obsession with top-line growth masks the problem of high levels of customer "churn", or turnover.
HDS's spokesman, Mark Richardson, estimates: "For every £1 of new single [pension] premium business reported by life offices, at least 70p is being lost as a result of investors switching between providers."
This is unsustainable over the long term, he warns, since the industry is spending considerably more money on attracting customers than on keeping them. "Ultimately, the impact will be felt by customers as the cost of churning erodes the financial position of life [companies]."
His concern echoes that of Sir Callum McCarthy, chairman of City regulator, the Financial Services Authority (FSA), who told an industry audience last month that this "merry-go-round ... proves a major obstacle to firms establishing long-term relationships with their customers".
But momentum for change is coming from within the industry itself.
Trevor Matthews, head of the UK life and pensions business at the insurer Standard Life, supports a switch to "net" pension sales information - in other words, showing losses and deductions as well as gains. "It makes sense to show what's going on in a more balanced way," he says. "We should, as an industry, be moving towards a clearer picture of what's going in and out."
For now, the ABI is taking slow steps to address the problem.
A work group looking at the issue "is at an early stage", says spokesman John French, "but we want to make the way that our data is presented more transparent."
Individual savers might raise an eyebrow at what will look like poor practice by the pensions industry, especially at a time when they are being encouraged to switch out of underperforming pension funds.
Thanks in part to new rules brought in on A-Day (6 April) this year, more savers than ever before are reassessing their existing retirement plans, and taking action. The changes introduced offer them greater flexibility in planning for retirement. For example, they can now put their personal savings straight into a pension to earn tax relief.
In particular, many independent financial advisers (IFAs) report that lower charges for self-invested personal pensions (Sipps) are encouraging many people to consider consolidating a number of smaller pension pots into one. (It often costs nothing to transfer a pension, and annual charges can be as low as 1.5 per cent.)
More than a fifth of adults over the age of 50 have at least three private pensions, according to research from the ABI, and workers now get through an average of five jobs in their professional life. This can easily lead to a clutter of pension pots - both occupational and personal - and make it difficult to keep tabs on your projected overall retirement savings.
Tom McPhail of IFA Hargreaves Lansdown says consolidation is often a good idea: "It is much harder to build a coherent investment strategy for retirement when it involves multiple accounts."
There are economies of scale, too. "Even with simple pension schemes like [low-cost and flexible] stakeholders, some give discounts [on fees] for large fund values, so it can make sense to have all your money in one place," Mr McPhail adds.
But whether or not you should put all your retirement savings in one place will depend on what types of pension pot you have, as well as on your personal circumstances and whether you can afford any pension transfer fees involved.
For many people, the most efficient course of action will be to visit an IFA with specialist pensions qualifications. Choose an adviser who charges upfront fees rather than working on commission.
Alternatively, you might want to do the research yourself. In that case, ask yourself some tough questions: how much flexibility do you want? Do you want to place all your money with one fund manager in a suitable company fund? Or do you feel you have the financial nous to take control of different assets within a Sipp?
Make sure you know exactly what assets you already have before taking any action.
"For example, many personal pensions taken out at least seven years ago [carry] high charges," says Justin Modray of IFA Bestinvest. "Look for what are called 'capital or initial units' - these have charges of up to 4 per cent a year for the life of a policy."
Compare this with a stakeholder fund, with charges of 1.5 per cent for 10 years, followed by 1 per cent for the rest of the term.
Also, some final salary company schemes - no matter how small - offer valuable guaranteed annuity rates; these will often be worth keeping, Mr Modray adds.
When considering a pension switch, ask the existing provider for a transfer value. Remember that the difference between this figure and your original sum (after deductions for fees) is what your new fund must produce in the short term, at the very least, to make it worthwhile switching.
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