Products Personal Pensions
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 simple.

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 your heirs.

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.

Stakeholder pensions
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.

Wrapper points
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 eyeing.

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.

Management quality
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 dodgy funds?

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.


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