September 23, 2011 5:44 pm

Pension charges still too high, finds survey

Millions of savers with personal pensions will retire with thousands of pounds less than they could have had, as higher-charging plans cut the value of funds by nearly 40 per cent.

At a time when retirement income is being reduced by inflation and record low annuity rates, a new survey has revealed that some investors are using personal pensions that take as much as 23.8 per cent from regular contributions over 25 years, and up to 39 per cent from single lump sum savings.

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An estimated 11m individuals hold personal pensions, largely because they don’t have access to a workplace scheme. Investors can keep the costs of pension savings down by investing in a stakeholder plan, or through a low-cost self-invested personal pension, which have brought down the cost of retirement savings over the years.

However, the annual survey of personal pensions carried out by Money Management , part of the FT Group, found that charges were “still too high, especially in today’s market”, with charges “eating invidiously into value over time”.

Skandia Life was found to have the highest charges for both regular and single contributions, on its Series 6 pension. Even assuming 7 per cent annual growth, over a 25-year term, a Skandia saver making monthly contributions of £200 a month would see £37,000 – almost a quarter – of their final retirement fund lost to charges.

This is in contrast to an average loss to charges of 14.5 per cent, and the 9.5 per cent reduction with the lowest-cost personal pensions from B&CE.

A saver with the same Skandia plan, but making a single lump-sum payment, would see charges wipe £21,140, or 39 per cent, from the projected fund value. This compares with an industry average of 24 per cent.

In response, Skandia points out that its charges were “not just pension charges, but also included the cost of fund management and financial advice”.

“The pension product used in these illustrations is principally designed for investment levels of over £50,000, at which point the annual management charge drops by two-thirds,” the company explained. Money Management also noted that Skandia had some of the best-performing unit-linked pension funds, as well as some at the other end of the spectrum.

Legal & General was “surprised” with its ranking in the tables, saying that its charges are similar to its competitors.

“It would be wrong to state that the survey has identified L&G’s personal pension plan as having one of the highest charges out of 27 companies surveyed because we have clearly shown that the survey is not comparing apples with apples,” claims L&G.

Friends Life, which took on the Axa pension business, says it used “prudent assumptions in its projections” for its with-profits pension, which results “in the estimated costs appearing higher” in the Money Management tables.

These findings come at a time when many insurers are preparing for a ban on commission payments to advisers by stripping out the cost of commission from their fund projections. As a result, Money Management concedes that the Skandia pension – which carries a
3 per cent adviser fee and 0.5 per cent trail commission – was not being compared on a like-for-like basis.

But the effects of commission are also shown in the survey. For example, the maturity value of a Friends Provident pension was £5,000 less in a commission-paying plan, compared with the provider’s low-cost stakeholder plan.

“Charges are very important – particularly in an environment where performance is diminishing because of market volatility and low interest rates,” says James Sumpter, financial planning director, with Bestinvest, the independent financial adviser. ”People have got to ensure that charges paid are appropriate to their investment strategies, and they are paying for performance. The higher-risk strategies generally have the highest charges.”

For those unhappy with their current plans, there are still some “excellent returns” being achieved by personal pensions, according to the survey, with the top unit-linked plan returning 29 per cent net over five years.

“If you are considering switching, make sure you know what you are giving up,” says Mike Fosberry, director of financial services, with Smith & Williamson, the investment manager. “If in a with-profits pension fund, check that there aren’t exit penalties or market value reductions (MVRs) that will be taken off the fund. Some plans also have guaranteed annuity terms of other valuable guarantees which you may not want to lose.”

Investors could switch to a low-cost stakeholder pension where annual charges are capped at 1.5 per cent. For those willing to take control over their investments, a low-cost online Sipp will charge about £200-£300 per year in administration fees, plus dealing and fund charges. “You want to look for a Sipp with no initial set-up charge, no administration fee and ideally one that rebates commission,” added Sumpter.

Money Management magazine, containing the full survey, is on sale from September 27.

Pensions: the true cost of charges      
Projected fund values (open market option) over 25 years, after all charges, as at 1 Juy 2011        
  Monthly premium of £200 pm Single lump sum contribution of £10,000
Provider Fund value Reduction from charges   Fund value Reduction from charges  
   (£) (£) (%) (£) (£) (%)
Axa – Personal Pension Unit-Linked 133,801 23,693 15.0% 41,253 13,021 24.0%
Axa – Personal Pension With-Profits 127,853 29,641 18.8% 38,229 16,045 29.6%
Axa – Stakeholder Unit-Linked 134,639 22,855 14.5% 42,268 12,006 22.1%
B&CE 142,566 14,928 9.5% 45,266 9,008 16.6%
Friends Provident  134,000 23,494 14.9% 42,200 12,074 22.2%
Legal & General Stakeholder 135,584 21,910 13.9% 40,733 13,541 24.9%
Legal & General Personal Pension 122,255 35,239 22.4% 33,332 20,942 38.6%
NFU Mutual* – Personal Pension 134,640 22,854 14.5% 42,269 12,005 22.1%
NFU Mutual* – Stakeholder 132,936 24,558 15.6% 40,207 14,067 25.9%
Norwich Union – Personal Pension 138,094 19,400 12.3% 43,034 11,240 20.7%
Norwich Union – Stakeholder 135,911 21,583 13.7% 40,910 13,364 24.6%
Prudential – Managed Fund (unfunded commission) 140,586 16,908 10.7% 42,588 11,686 21.5%
Prudential – With-Profits fund (unfunded commission) 132,513 24,981 15.9% 39,207 15,067 27.8%
Prudential – Managed fund (funded commission) 42,621 11,653 21.5%
Prudential – WithProfits fund (funded commission) 39,231 15,043 27.7%
St James's Place* N/A N/A
Scottish Equitable – Stakeholder  134,643 22,851 14.5% 42,271 12,003 22.1%
ScottiStakeholder Equitable – Flex Personal Pension 142,060 15,434 9.8% 45,163 9,111 16.8%
ScottiStakeholder Life – Personal Pension 142,444 15,050 9.6% 42,032 12,242 22.6%
ScottiStakeholder Life – Stakeholder 134,631 22,863 14.5% 42,265 12,009 22.1%
ScottiStakeholder Widows – Unit linked 134,465 23,029 14.6% 42,180 12,094 22.3%
ScottiStakeholder Widows – With profits 131,426 26,068 16.6% 41,630 12,644 23.3%
Skandia Life – Series 6 (3 per cent adv fee +0.5 per cent trail) 120,050 37,444 23.8% 33,134 21,140 39.0%
Standard Life – Personal Pension 138,600 18,894 12.0% 42,248 12,026 22.2%
Standard Life – Stakeholder 137,806 19,688 12.5% 42,654 11,620 21.4%
Wesleyan Assurance* 132,533 24,961 15.8% 40,201 14,073 25.9%
Zurich Assurance 136,059 21,435 13.6% 41,635 12,639 23.3%
No charges 157,494     54,274    
Stakeholder (1 per cent throughout) 134,535 22,959 14.6% 42,215 12,059 22.2%
Stakeholder (1.5 per cent 1st 10 yrs, 1 per cent thereafter) 132,548 24,946 15.8% 40,209 14,065 25.9%
Best fund (lowest charges) 142,566 14,928 9.5% 45,266 9,008 16.6%
Industry average 134,587 22,907 14.5% 41,106 13,168 24.3%
Lowest fund (highest charges) 120,050 37,444 23.8% 33,134 21,140 39.0%
  Notes
 Figures are for personal and/or stakeholder pensions taken out on 1 July 2010, updated to 1 July 2011, for a male life, due to retire at exact pension age 65.
 The policy is assumed to have been effected, and the premium paid, by policyholders aged exactly 40 years at outset (with final monthly premium paid one month before 65th birthday).
 Policyholder is assumed to be contracted into SERPS.
 Growth rate assumed is 7 per cent a year gross, from which have been deducted all charges, including the annual fund management charge.
 Where charges differ between the funds, the managed fund has been used.
 Where more than one managed fund, the largest has been used, whether managed internally or externally.
 Rates for charges that escalate with RPI or NAEI taken as 2.5 or 4 per cent a year respectively.
 A 2.5 per cent increase has been assumed for charges which, although not formally linked, are in practice regularly increased.
 Except where otherwise stated, full commission is assumed to be payable to sales representatives/ independent advisers, at the rate at which the bulk of the company’s business is normally transacted.
 * St James’s Place minimum premiums are £500 a month/£20,000 lump sum
 Source: Money Management magazine

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