Is Your Old Pension Scheme Bad?

Is Your Old Pension Scheme Bad?
Fiji by Julian Cohen. Why?

In a shocking report, the Office of Fair Trading says £40 billion of pension savings are locked in poor value company-run schemes

If you’ve left a money purchase company pension with a former employer, pay close attention.  The same problems could apply if you have money in older style personal pensions. What to do about it is shown below.

In its long awaited report on the £275 billion ‘defined contribution’ money purchase company pension market, the Office of Fair Trading (OFT) has said it’s worried that £40 billion is trapped in pensions that are exposed to high charges, providing poor outcomes.

Charges are a particular problem for money purchase pensions, for your retirement pot is dependent on contributions plus investment growth, less the charges.

It's a simple relationship. The greater the charges, the lower your pension!

As you saw from the article entitled Stockmarket Fund Charges Exposed, charges are one of the big killers when it comes to pension performance. 

What The OFT Discovered Beggars Belief

Have A Look At The Report's Outrageous Findings

  • A 0.5% Annual Management Charge reduces a pension pot by 11% over its lifetime, but a 1% Annual Management Charge reduces it by 26%.  That’s our old mate, compound interest, working against you.
  • Not only did the OFT find 18 different charging configurations, it couldn’t assess the full impact of charges as providers hadn’t given sufficient evidence of what costs they impose.  How can they get away with it?
  • The report concluded that former pension members paid on average 26% more in charges than a current pension member.  And I thought treating customers fairly is right at the heart of the Financial Conduct Authority.

Richard Lloyd, director of consumer group Which? said “the OFT did not go far enough to prevent billions of pounds of consumers’ money from languishing in poor value schemes”.

In the face of such damning criticism, the pensions industry has agreed to review £30 billion of older schemes.  The Pensions Regulator will assess £10 billion of small schemes to ensure they are providing value for money. 

That could be good news for you.  But I wouldn’t wait for the results of the review, for these things often take a jolly long time, and when it comes to pensions, time is the most precious commodity you have.  Missing out on even a few months growth can have a dramatic effect on your final benefits.

Merging Your Pensions Can Cut Costs

If you have preserved money purchase pensions from previous periods of employment, it can make sense to consolidate them into one pot.  The major benefit is a significant reduction in charges, which immediately transfers into higher growth. 

However, you shouldn’t automatically switch providers, for it doesn’t always pay to change schemes. 

Here Are Reasons Why Switching Could Be Expensive

  • Your former pension scheme may impose an exit charge that wouldn’t be levied if you left your money invested.
  • You may enjoy the right to a guaranteed annuity rate which you’d lose on transfer – it could be notably higher than today’s very low annuity rates.
  • If some of your money is invested in ‘With Profit’ funds, you may lose the right to a significant bonus if you move your money out before retirement.

What You Should Do If You Have An Old Money Purchase Pension Scheme

Without doubt, moving your money without detailed analysis is unlikely to be the right thing to do. 

Of course, you could do the analysis yourself.  But you have to be persistent and you have to keep nagging your former pension provider for a full and complete breakdown of all the charges it’s merrily extracting from your fund.  Be under no illusion it’s a time consuming exercise.  What’s more, if you don’t know what you’re looking for, you won’t know if it’s missing!

If you don’t have the time, the inclination or indeed the knowledge to ‘do it yourself’, let alone understand what it is you’re looking at when all the numbers are eventually disclosed, the best solution is to seek advice from a specialist pension adviser. 

It won’t surprise you to learn we have such experts on our panel at SIPPclub.  If you want an introduction, just ask.

Experience from other SIPPclub members reveals that this is an exercise worth doing earlier rather than later.  That’s because propping up the profits of your former pension provider isn’t going help you or your family one iota!

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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