Pension investors receive a poor dealPosted on: 04 October 2010 by Editor at Large
At the age of 22, writes Independent Financial Advisor Peter McGahan, I was told to make a will and start a pension. Nothing could have been further from my mind at the time.
Back then, the costs of setting up a pension contract were extortionate. In the first two years my pension contributions disappeared in commissions, and one way or another the insurance company managed to chip away at the rest until there was virtually nothing left.
Many providers have continued with these schemes, and consumers, with an apathetic approach to the 'pension in the background', will be distraught if they look at the value they receive for the rates they pay.
Whether it's these charges, poor performance through being invested with a Titanic style insurance fund or penal product terms such as reduced death benefits, the investor, in most situations I see, is receiving a poor deal. But why do so few pension investors do so little about it?
Last month I covered the returns we receive, but here's a quick update. Alico Rathbone, the worst UK life and pensions performer returned - 48.5% over the last five years. Skandia had three of the worst 10 funds returning around than -24%. That isn't so impressive when one of them is an 'Alpha' fund - it is supposed to bring in a return better than the index.
Skandia Rensberg, the best fund, returned over 86% in the same period and the average performer returned 20.8%. Sitting back and ignoring your pension fund, then, is not an option.
The statistics on securing a decent pension fund at retirement are worrying.
If, for example, you wanted to secure a pension income of £10,000 in 20 years time and wanted that sum to have the same purchasing power as it did today, you would need to take into account inflation. If we said we expected inflation to sit at 3.1% over the 20 years, that would mean we would need a pension income of £18,415 (which should rise in retirement).
You can see now why so many employers and the UK government have said that final salary schemes offering an open ended cheque with their index linked, inflation-proofed benefits will have to go. They simply cannot afford it.
If you do have a final salary scheme such as this, consider the plight of those who do not. Given today's annuity rates, you would need a pension pot of £334,000 in 20 years to achieve the income target above. If you were just starting your pension contributions today, that would cost you £750 per month.
If you started 10 years earlier it would have cost £375, and just £200 per month if you started at age 25 to retire at 65.
The average employer contribution to a final salary scheme is a staggering 23.2% of salary, however those with a personal pension are paying a mere 6.7%.
The tide is changing as employers move the risk from the company over to the performance of the fund manager, as that will determine the size of the pension pot at retirement.
With only 23% of final salary pension funds in the private sector remaining open to new entrants, it seems more than peculiar that virtually all public sector schemes are still open to new entrants.
Those in a personal pension scheme, however, need careful advice on what to do with that final pot.
Amazingly 68% of all pension holders choose to buy their annuity with the company they have been investing with, and only 3 out of 10 of us are canny enough to actually look outside and improve their income with the options in the market.
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email email@example.com.
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