How Healthy Is Your Pension?
I remember back at the age of 22 I was told to make a Will and start a pension. Nothing could have been further from my mind. Either way, I did it. Back then, the costs of setting up a pension contract were extortionate. My first two years’ pension contributions disappeared in commissions, and one way or another the insurance company managed to pilfer away until there was virtually nothing left. Many providers have continued with these schemes and consumers with an apathetic approach to the ‘pension in the background’ will be distraught if they look at the value they are receiving for the charges they are paying. Whether it’s charges, a poor performance through being invested with a Titanic style insurance fund or penal product terms such as reduced death benefits, the investor, in most situations I see, is receiving a poor deal. But why do so few pension investors do anything about it? I covered the returns we receive a month back but to remind you and to update: Today, the worst performer in the UK all companies life and pensions section (Alico Rathbone) returned -48.5% over the last five years. (1) Skandia had three of the worst ten funds returning less than -24%. That isn’t so impressive when one of them is an ‘Alpha’ fund - it is supposed to bring in a better return than the index than you might expect for its risk (or it’s a twaddle marketing name as others less inclined to listen to marketing might refer to it.) The best fund (Skandia Rensberg) returned over 86% over the same period and the average performer returned 20.8%, so sitting back and ignoring your pension fund is not an option. The statistics on securing a decent pension fund at retirement are worrying, but there is little point in getting excited about them if we have that level of wastage within the scheme we already run as above. If, for example, you wanted to secure a pension income of £10,000 in 20 years’ time and wanted that £10,000 per annum to have the same purchasing power as it did today, you would need to take into account inflation. If we said we expected inflation to sit at 3.1% over the 20 years, that would mean we would need a pension income of £18,415 (which should rise in retirement).(2) You can see now why so many employers and the UK government have said that final salary schemes offering an open ended cheque with their index linked, inflation proofed benefits will have to go. They simply cannot afford it. If you do have a final salary scheme such as this, consider the plight of those who do not. Given today’s annuity rates you would need a pension pot of £334,000 in 20 years to achieve the income target above. If you were just starting your pension contributions today that would cost you £750 per month. (2) If you started 10 years earlier it would have cost £375, and if you started at age 25 to retire at 65 it would cost just £200 per month The average employer contribution to a final salary scheme is a staggering 23.2% of salary; however those with a personal pension are paying a mere 6.7%. The tide is changing as employers move risk from the company over to the performance of the fund manager as that will determine the size of the pension pot at retirement. With only 23% of final salary pension funds in the private sector remaining open to new entrants, it seems more than peculiar that virtually all public sector schemes are still open to new entrants. Those in a personal pension, however, need careful advice on what to do with that final pot. Amazingly 68% of all pension holders choose to buy their annuity with the company they have been investing with, and only 3 out of 10 of us are canny enough to actually look outside and improve their income with the options in the market. (2) Puzzling. If you would like a review of your pension call Peter on 0845 230 9876, e-mail info@wwfp.net 1 trustnet 2 fidelity About Peter McGahan and Worldwide Financial Planning: Peter McGahan is the Managing Director of Worldwide Financial Planning - FT Award winning Independent Financial Advisers. Peter writes for many national and local press publications and is widely repected as an expert in personal finance. Worldwide Financial Planning specialise in the provision of expert one-to-one advice in the areas of Mortgage, Business Finance, Investment, Pension and Retirement Planning and Inheritance Tax. Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’ |
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