|Do not lose track of basic savings
principles when struggling in the pensions morass.
"You've got to be Einstein to understand
pensions" said Malcolm Mclean, chief executive
of the Pensions Advisory Service, in 2003. He was right. But he
was referring to the regulations. The pensions concept is quite
Let's clear up some terminology
When you talk about a pension you probably mean the income you are
going to get when you retire. But as used on this page (and by financial
product providers) 'pension' has a more precise meaning. It is a
set of savings products parcelled up to take advantage of favourable
tax breaks and then sold to you as a package, usually called a pension
plan. So a pension plan is a savings plan in a wrapper.
The big difference from conventional savings is that
there are extensive rules on what you can do with the assets after
retirement. You will be limited in the extent to which you can withdraw
your savings without penalty; and those savings that remain within
the wrapper must be used in a defined way to give you a regular
income until death, typically by buying an annuity.
Unlike other forms of savings there is no capital to pass on to
Choosing a plan
The savings plan (contents of the wrapper) must be assessed (by
you) in exactly the same way as you would judge any of your savings
for the long-term. There are no unique investments that you can
only make for 'pensions' and not for any other purpose. So all the
warnings about other savings products apply equally to pension plans.
These are conventional pension plans that conform to certain government
requirements on charges and risk. The original concept of providing
low-cost, simple pension plans for the less wealthy got lost when
the government caved in to industry pressure to allow managment
charges of up to 1.5%. This makes them no more than ordinary pension
plans with a confusing government endorsement.
There's a whole new set of things you need to watch for:
- Charges - what you are charged to get in,
to get out, and for annual administration. This will be on top
of any fund mangement charges for investments within the wrapper.
- Ease of exit - can you get out?
- What choices do you have in the savings plan?
Can the investment policy be changed to something you don't like?
Are you given any information on past performance, either of the
Plan or of the managers?
- Can the provider put up charges in the future?
- Can the provider change any of the other terms
in the future?
There can be enormous variation in these things.......
......which makes your choice of plan critical.
Pension plans will trumpet their tax advantages.
This is quite correct: they are considerable (tax relief at your
top rate on your contributions and no tax on gains and income within
the wrapper). But these advantages apply to all
pensions within a wrapper. They should not be interpreted as applying
to the particular pension plan whose marketing literature you are
Here is a snippet from Investors Chronicle, July 2004:
A new pension plan from Scottish Equitable sees
a return to a pre-stakeholder charging structure based on
high commission for IFAs and penalty clauses for switching.
The annual management charge for the pension
is 1% per year but IFAs can be paid up to 6% per year for
the first five years after selling the pension. If you surrender
the plan after five years an average investment growth of
7% per year would be reduced to just 2.2% per year. Tim Whiting,
of IFA Bestinvest, says this kind of pension plan is designed
to encourage IFAs to sell it and to force loyalty by locking
investors in through charges."
Need we say more? The magic of compound
interest ensures that high charges can eat up the tax breaks
on personal pension plans. Don't let that happen to you.
Some plans have a method of charging involving "allocation
units". It is incomprehensible. Sorry, but obviously you will
not be buying such a plan.
There are some terrible pension plans out there. Hey, you're a captive
customer, probably naive, probably unquestioning. What better place
for any financial services group to park their dodgy managers and
But you can fight back...
...........through Self Invested Personal Pensions (SIPPs).
If carefully chosen, a SIPP can give you the flexibility and low
costs you need for successful long-term saving.