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.
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
General Election 2015: How you vote next week could affect your finances
Dirty tricks in a divorce can cause some nasty surprises
Social tenants locked into energy tariff for 40 years
Have you won £1m in the May Premium Bonds draw?
- 1 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 3 Top Gear: Jodie Kidd, Philip Glenister and Guy Martin 'in advanced talks' to replace Jeremy Clarkson and co
- 4 Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
- 5 How to gain confidence and maximise your sexual potential
iJobs Money & Business
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...
£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...
£215 per day: Ashdown Group: Junior Project Manager (website, web application ...
£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...
Day In a Page
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings