People lose thousands of pounds after pulling out of pension plans early

Damning evidence has emerged to show that hundreds of thousands of people who pay regularly into personal pensions risk losing thousands of pounds each when they halt contributions, writes Andrew Verity.
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The Independent Online
The Personal Investment Authority (PIA), the financial regulator, yesterday released figures showing that more than one-third of all people who bought regular-premium pensions from life insurance sales people stopped paying contributions within three years.

The figures show many of the UK's biggest names, including Lincoln, Allied Dunbar, Guardian Financial Services, Black Horse Life and Barclays Life, have even poorer so-called "lapse rates". Separate research by Alan Lakey, an independent financial adviser writing for Money Management magazine, shows that many of those who lapse their policies early risk losing out because of heavy initial charges. He said yesterday: "No wonder the public places such little trust in the industry."

The PIA figures show that, after three years, 45 per cent of all regular premiums going into Lincoln's pensions have stopped. After two years, 30 per cent have lapsed their policies. Joe Palmer, chairman of the PIA, said: "Persistency is an important indicator of the quality of business that a firm has transacted. Although these results show that progress has been made, the industry will need to work very hard to reduce the lapse rate and regulators will be paying particular attention to the weaker performers."

Among the worst lapse rates identified in the PIA report, Guardian Financial Services, part of the insurance giant GRE, has a persistency rate of barely 55 per cent.

Norwich Union, which recently floated on the stock market, is marginally above average over three years, with 67 per cent still paying into its plans. Legal & General, where Mr Palmer was chief executive until joining the PIA, barely rates 64 per cent. Among the best companies are Standard Life, with an 88 per cent persistency rate, and Scottish Amicable, with 83 per cent.

Mr Lakey's research shows that those who do lapse their policies with Lincoln receive a poor return because of the way the company extracts its charges. After two years of paying pounds 200 a month - a total of pounds 4,800 - their pension would be worth just pounds 1,346, even assuming annual growth of 9 per cent for each year.

The research shows that if left to grow over the next 28 years, the plan would be worth only pounds 8,127, less than one-third of what it would be worth with the average company.

Lincoln said it had changed the way it extracted charges from its pension contract so there were no penalties for stopping and starting payments. However it has no plans to rectify the situation for past policyholders.

A Lincoln spokesman said: "The persistency of our policies is low because we allow people to switch policies and because we have made a number of acquisitions in the last few years, such as Laurentian.

"Many said they would go back into our policies if they had the opportunity."

According to Mr Lakey's analysis, first published in Money Management, Allied Dunbar shows the worst value for money when policyholders lapse after paying in for five years.

Despite five years of paying pounds 200 a month, holders of a regular-premium personal pension will have just pounds 9,149 in their pension fund after investing pounds 12,000.

A spokesman for Allied Dunbar said: "Our financial advisers always say that a pension is a medium to long-term investment. We will strenuously push that point in our sales documents."