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Negative returns for personal accounts

Cazalet Consulting principal Ned Cazalet has attacked the Government’s plans for pension personal accounts, claiming that if a product provider launched the scheme, it would be “fined to Kingdom Come” by the FSA.

Cazalet this week published calculations of retirement incomes derived from personal accounts, depending on different decumulation periods.

He found that, even excluding the impact of means-testing, many people are likely to receive low returns.

Assuming an investment return of 7 per cent and an annuity rate of 7.2 per cent and taking charges into account, total returns on contributions into personal accounts would range from 4.6 per cent to -20 per cent, depending on the length of time invested.

When means-testing is taken into account, the effects are “atrocious”, according to Cazalet, delivering negative returns in most cases.

Based on a means-testing reduction of 40 per cent, Cazalet’s research shows that returns on contributions range from 2.3 per cent to -27.5 per cent.

He says that many people will have even poorer returns due to contribution lapses.

Cazalet says: “If the Personal Accounts Delivery Authority or the Department for Work and Pensions were regulated by the FSA, this could never be launched because it treats customers very unfairly. If a provider launched it, the FSA would fine it to Kingdom Come. Many people would be better off putting their money in a teapot.”

Conservative Shadow pensions minister Nigel Waterson says: “This report shows there is a real risk that personal accounts will fail.

“We welcome the work programme that the Government is undertaking on means-testing but if the issue is not resolved, then it is a deal-breaker for us.”

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