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September 23, 2011 5:44 pm
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.
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%|
|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%|
|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%|
|Lowest fund (highest charges)||120,050||37,444||23.8%||33,134||21,140||39.0%|
|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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