WE ALL know that personal pensions are often expensive to set up. But the good news is that once you are in, you can usually switch between different investment funds for free.
That does not sound like much of a perk, but it can be useful, so it is worth checking how easy (and cheap) it is to move your money around within the pension before you take out a policy. Most pensions offer a wide choice of investment funds, and when you buy a personal pension you (or your financial adviser) simply choose which ones you want your money to go into.
A younger person in their twenties or thirties might have an adventurous range of funds, including investments in emerging markets for example. As you get older, you should be more conservative with your pension. The bottom line is that you do not want to be left with lots of stock market funds that have crashed in value a week before your retirement party.
Even if you are still young and have never thought about how your pension is doing, it is worth taking a look at its performance. Phone up the pension firm and ask for performance statistics or get a copy of Money Management, which carries performance tables. It may be that the pension provider has top-performing funds that you are not in because you did not consider them when you were advised to buy the pension. (Or, more likely, the adviser did not suggest them to you.)
Most companies allow you to make one free switch a year. But you do not have to restrict yourself to a single change. Many pension firms count any number of movements between funds made on the same day, and on the same form, as a single switch.
Extra switches normally cost between pounds 10 and pounds 25, but some companies are now even offering several free switches a year.
Switching between funds is particularly important for those nearing retirement who are heavily invested in equities, especially when many feel that stock markets have become overvalued.
Good alternatives include funds that invest primarily in longer-dated gilts. These may be called gilt funds, fixed interest funds or even retirement protection funds. The attraction here is that gilt prices tend to move in the opposite direction to the values of retirement annuities. (An annuity is the annual pension you buy at retirement; see below.) Annuity rates are already low, but if they fall any more, the effects should be offset by an increase in the value of your gilt fund.
Peter Quinton, the managing director of The Annuity Bureau, says: "Gilts involve less risk than equities but their performance is still highly unpredictable as it ebbs and flows with supply and demand."
Cash funds are another option. They do not offer protection against the problem of declining annuity rates but they do offer greater security than gilt funds in the sense that they cannot fall in value.
Unless you are a keen investor, it is best to make switches after consulting a good independent financial adviser (IFA). If you are coming up to retirement, you can roll this discussion into a general pre-retirement financial review.
If an IFA sold you a pension, he or she should contact you to arrange a free review. You may not realise it but IFAs get renewal commission for every year that you pay into the policy, which should more than pay for any time spent sorting out your retirement finances.
If you did not buy from an IFA, you can ask for a review from an adviser on a fee-paying basis. Look for a company with plenty of pensions experience. The adviser will look at your arrangements for around pounds 200. (It will cost you a lot more if you have extremely complex finances and have paid into several different pensions over the years.) The Institute of Financial Planning has a list of fee-based IFAs who are all highly qualified. Call 0117 930 4434.
As an alternative to consulting an IFA, you can tick a box to allow your personal pension provider to start transferring your money to lower-risk funds five or 10 years before retirement. The obvious downside of these options, which normally transfer a set percentage of funds each year, is that they may move money at the wrong time. An IFA can adapt a strategy to reflect his or her interpretation of the investment climate.
If you are the type who is never likely to get around to seeing an IFA then these so-called "lifestyle switching programmes" are better than doing nothing at all. You can always change your mind without paying a penalty.
For those who are a long way from retirement, the tense state of the stock market is not critical because any market downturns are likely to become insignificant in the long term as equities consistently outperform other asset classes if you can leave the money invested for many years.
If you can bring yourself to confront your finances every year, there is much to be said for taking an annual financial planning review with an IFA. This should be free and will, among other things, highlight the need for any switches in your pension. For example, your adviser may feel strongly that a new fund manager is not up to standard.
Do not panic if you do not have the time or the interest to revisit your pension. Anyone with money invested in equity funds who is a long way from retirement is unlikely to go too wrong by sitting tight. And if the market drops substantially in future, do not move your cash. You can lose money by coming out at low prices. Hang on and things will improve.
q Annuity. A contract to supply you with an annual income in retirement.The deal is that you hand over most of the money you build up in your pension fund and get an annuity in return. You can choose to fix your income for the rest of your life, or get an increase as you get older. People who have final-salary company schemes do not buy annuities.
q Equities. The ordinary shares of a publicly quoted company.
q Gilts. Gilt-edged securities are fixed-interest investments issued by the Government. Effectively you loan money to the government when you buy gilts and then receive some interest in return. A lower-risk investment.
q Personal pension. A pension scheme that you set up as an individual. If you are offered a company scheme, it is usually best to go into that instead. Charges are lower than on personal pensions and your employer will also pay in some money.
Switching funds within a company pension scheme
q Switching facilities are also available in many company pension schemes. It depends on what type of pension you have.
- Anyone in a "final salary" scheme, where annual contributions build up a right to a pension at retirement, has no say in how funds are invested.
- Those in "money purchase" schemes, where a pot of money builds up in the employee's own name, can make switches. The best money purchase schemes offer the same fund ranges and charging structures for switching as the best personal pension plans.
q The full range of options available to you should be outlined in an explanatory booklet given to all new scheme members.
- If you have lost it, get another copy from your employer's human resources department.
q Some company schemes even employ an IFA to offer advice on investment choices and other aspects of retirement planning.
q Those in company schemes usually enjoy a valuable safety net in the run up to retirement. If they do not perform investment switches to safer funds, the trustees will normally trigger a default switching programme on their behalf.