Savers rue bad advice on pension top-ups

SAVERS in pension top-up schemes may have lost many hundreds of pounds because they were wrongly advised to start private plans rather than opt for deals offered by their own companies.

Losses are likely to mount, because savers have not only lost the one- off costs involved in setting up these schemes, including commission payments; they also pay higher annual management charges for as long as the plans, called free-standing additional voluntary contributions or FSAVCs, are kept going.

But the Personal Investment Authority, the insurance industry's watchdog, is so far refusing to give guidance to sales staff and independent financial advisers on the conditions under which these plans should be sold.

Steve Mingle, an AVC expert at the consultant actuary Bacon & Woodrow, said: "It is increasingly clear that this is an area of concern. It is important that this problem should be nipped in the bud. What worries me is that it is becoming obvious there are many people who would have been better advised to make other arrangements for their contributions."

Millions of savers already contribute to their existing company pension schemes. Many opt to boost their retirement payout even further by making extra contributions to their schemes.

Where this is not possible, companies often give staff the chance to opt for an in-house additional voluntary contribution system, called AVC.

Under this arrangement, the company does a deal with a fund manager on behalf of its staff. The fund manager agrees to look after the money in return for a low charge, sometimes paid by the company. Crucially, the fund manager does not receive commission for this service.

As long as the pension scheme trustees have reached agreement with a reputable manager, there is no reason to believe that a fund's performance will be any different from a FSAVC.

Yet hundreds of thousands of people are believed to have opted for FSAVCs instead. They are charged commission, usually the first year's contributions, for doing so. They also pay higher annual fund management charges.

Mr Mingle said: "I have spoken to a lot of pension trustees and have found that in a significant numbers of cases, their scheme members are opting for FSAVCs even though there are very competitive in-house AVC arrangements in place. Although it may be perfectly justified for someone to set up a private scheme, it is likely that many may have been wrongly advised."

But he said the scale of any likely redress would not be anywhere near the estimated £3bn that insurance companies may have to pay to the 1.5 million people affected by poor pensions advice. Responsibility for monitoring pension sales has passed to the newly formed Personal Investment Authority.

A PIA spokesman said: "The issue of whether to give specific guidance on this subject is under active consideration. I am not in a position to say whether we will or not.

"Our members are already required to give appropriate advice in relation to the needs of the individual. This would include taking account of alternative ways of retirement saving, where they exist and are deemed to be more appropriate."

He added that anyone who thought they had been wrongly advised to take out a FSAVC could make a formal complaint to the PIA Ombudsman.