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Drain on resources

I have received a statement from my personal pension provider that seems to show that my fund at retirement will be worth less than it is today, even if it grows at 5 per cent a year. Can this possibly be right?

I gather that you have what I would describe as an “old” type of pension plan.

Before the introduction of stakeholder pensions in 2001, most personal pensions had a number of charges that were applied to the contributions paid and the value of the plan.

These charges might typically include a monthly policy fee of a couple of pounds which might increase each year in line with price or salary inflation. Each contribution paid into the plan might also be subject to some kind of initial charge, for example, a bid/offer spread with units purchased at one price, known as the offer price, but valued at a lower price, known as the bid price, to calculate the value of the plan. The bid/offer spread might usually be 5 per cent.

The first couple of years of contributions or any contribution increase might also be subject to something called a capital unit charge in the form of an additional management charge – additional because each of your selected investment funds might also have an annual management charge of between 0.5 and 1.5 per cent depending on the nature of the investment funds, as passive or tracker funds sometimes have lower charges than active or managed funds. Capital units might impose an additional annual management charge of, say, 3.5 per cent a year.

Each contribution paid might have a further charge deducted where the amount allocated to investment units was less than 100 per cent. Conversely, where the allocation rate was greater than 100 per cent, this would have the effect of reducing the charges levied against the contributions.

Retiring before the selected benefit age on your plan or transferring away from the plan might also result in a further charge, effectively bringing forward the future management charges that would have been paid had you kept your plan with the provider.

I have come across examples like the one you describe where the plan has been made paid-up, in other words, contributions have ceased to be paid. The illustration that you have received seems to demonstrate that the future charges that will be taken from your plan are greater than 5 per cent each year. In the most extreme of circumstances, it is even possible that the future charges might completely erode the value of your plan.

You may find that you are between a rock and a hard place in that if you transfer out to a lower-charged plan, possibly a stakeholder plan, the transfer value will be lower than the current value of the plan. It is, however, pretty much a no-brainer in that a lower transfer value today is better than possibly no value at all in future.

Quite where products of this type fit with the FSA’s principle of treating customers fairly is difficult to say. As you purchased the plan some years ago and the charging structure was set within the policy documentation, the provider could argue that it is doing nothing wrong. Most reasonable people might argue that such a product is a real and tangible barrier to allowing you to change, which seems to contradict at least one of the TCF outcomes required by the FSA.

You should definitely consider transferring from your highly-charged plan into a lower-cost product.

Strangely, your current provider may well provide a better plan for you, not just in terms of lower future charges but also in terms of wider investment choice. You may wonder why your provider has not already advised you to do this. I guess it is rather like being attracted to a deposit account offering a competitive interest rate which over time ceases to be competitive.

In an environment of TCF, the FSA really should be insisting that product providers identify where such a change might be beneficial to a policyholder.

Nick Bamford is managing director of Informed Choice


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