New Pension World
New Pension World
Charges
Before the advent of stakeholder pensions the level of charges in personal pensions was relatively high. A typical list of charges would be along the lines of:
Bid/Offer Spread: 5% difference between the price of units bought and their selling price. This was effectively a loss of 5% on each and every contribution from the first regular payment to the last, to even single contributions.
Annual Management Fee: This would range from 1% to 2% per year on the value of the fund.
Initial Units: These were special units bought within the first two to three years which were then held until maturity and were subject to a further 3% (average) charge per year on their value.
Policy Fee: This is a flat rate fee, usually in the region of £1.50 per month. While this is small, it is a flat rate charge, and therefore has a disproportionately larger effect on small premiums, and sometimes single premiums.
Switching Fee: This was levied in the event you wanted to switch funds within the pension.
Transfer Fee: This would be a back-end charge if you chose to transfer your fund to another provider.
Obviously, these charges and their amalgamation, often resulted in significant loss to the fund value. Indeed, the initial units had to grow by more than 5% per year to simply break even, and that did not take into account the 5% bid/offer spread.
When stakeholder pensions were introduced things started to change. Stakeholder plans were forced to operate within a 1% per year cap. That meant that all of the above charges, when totalled, had to be no more than 1% per year. Clearly this was a big change, and has had a dramatic effect on pensions. A two-tier system soon developed where a potential customer had the option of investing in an old-style pension, with all the associated charges, or a stakeholder scheme with a fraction of the charges. Clearly the stakeholder was chosen, resulting in significant loss of business for the traditional pension providers.
As a way of combating this, many quality pension providers revised their products and brought down the charges on their personal pensions to be broadly in line with stakeholder. This has meant that not only does new pension business go to these providers, but there is also the ability to transfer clients out of the old style plans into the new charged contracts, thus reducing their ongoing charges and thus increasing growth potential.
Fund Choice
This was the next problem. In order to operate within the 1% rule, stakeholder schemes could not offer much in the way of fund choice. So, like old style plans, you would have the choice of only a small number of funds managed by the insurance company itself, or its’ appointed fund managers (internal funds).
Since then however, a number of progressive pension companies have seized on a trend from Australia by offering funds not managed by themselves, but rather managed by some of the world’s top fund managers (now known as External Funds). The result is now you have the ability to invest in a pension with (say) Legal & General, and all the tax benefits that incurs, while having your funds invested with (say) Fidelity, Artemis or Threadneedle Asset management – all within a charging structure which is actually less than you would be charged if you invested with those companies outside the pension.
In my view it is this combination of lower charges and top quality funds which will transform pension performance over the next ten years.
New Pension World - To learn more about this author, visit Craig Davidson's Website.
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When we are looking at pensions these days there are two main factors which are important. The first is the level of charges and the second is the fund options.
Charges
Before the advent of stakeholder pensions the level of charges in personal pensions was relatively high. A typical list of charges would be along the lines of:
Bid/Offer Spread: 5% difference between the price of units bought and their selling price. This was effectively a loss of 5% on each and every contribution from the first regular payment to the last, to even single contributions.
Annual Management Fee: This would range from 1% to 2% per year on the value of the fund.
Initial Units: These were special units bought within the first two to three years which were then held until maturity and were subject to a further 3% (average) charge per year on their value.
Policy Fee: This is a flat rate fee, usually in the region of £1.50 per month. While this is small, it is a flat rate charge, and therefore has a disproportionately larger effect on small premiums, and sometimes single premiums.
Switching Fee: This was levied in the event you wanted to switch funds within the pension.
Transfer Fee: This would be a back-end charge if you chose to transfer your fund to another provider.
Obviously, these charges and their amalgamation, often resulted in significant loss to the fund value. Indeed, the initial units had to grow by more than 5% per year to simply break even, and that did not take into account the 5% bid/offer spread.
When stakeholder pensions were introduced things started to change. Stakeholder plans were forced to operate within a 1% per year cap. That meant that all of the above charges, when totalled, had to be no more than 1% per year. Clearly this was a big change, and has had a dramatic effect on pensions. A two-tier system soon developed where a potential customer had the option of investing in an old-style pension, with all the associated charges, or a stakeholder scheme with a fraction of the charges. Clearly the stakeholder was chosen, resulting in significant loss of business for the traditional pension providers.
As a way of combating this, many quality pension providers revised their products and brought down the charges on their personal pensions to be broadly in line with stakeholder. This has meant that not only does new pension business go to these providers, but there is also the ability to transfer clients out of the old style plans into the new charged contracts, thus reducing their ongoing charges and thus increasing growth potential.
Fund Choice
This was the next problem. In order to operate within the 1% rule, stakeholder schemes could not offer much in the way of fund choice. So, like old style plans, you would have the choice of only a small number of funds managed by the insurance company itself, or its’ appointed fund managers (internal funds).
Since then however, a number of progressive pension companies have seized on a trend from Australia by offering funds not managed by themselves, but rather managed by some of the world’s top fund managers (now known as External Funds). The result is now you have the ability to invest in a pension with (say) Legal & General, and all the tax benefits that incurs, while having your funds invested with (say) Fidelity, Artemis or Threadneedle Asset management – all within a charging structure which is actually less than you would be charged if you invested with those companies outside the pension.
In my view it is this combination of lower charges and top quality funds which will transform pension performance over the next ten years.
New Pension World - To learn more about this author, visit Craig Davidson's Website.
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Kim CastleWith nearly two decades in the advertising and design business, with clients like Domino's Pizza, General Motors, Direct TV, Pedigree, Wolfgang Puck, Higher Octave Music, Hollywood Celebrity Products, Disney, and Paramount, as well as thousands of entrepreneurs around the world define, structure, communicate, and position their business for greater profits, BrandU(R) co-creators Kim Castle and W. Vito Montone discovered that entrepreneurs could experience the same power that big brands command for a fraction of the cost with the world's only process-based results-drive Integral approach to business creation. BrandU(R) is helping entrepreneurs grow with the power of extreme clarity from idea...to brand...to market(TM) and helping one million entrepreneurs become successful and whole so that they can make a difference in the world. Are you one of them? If you want to experience clarity all the way to the bank(TM), get started now at http://www.brandu.com. - Visit Kim Castle's Website |
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John AlexanderJohn has taught keyword research and SEO skills to small groups of business owners and Webmasters from over 80 different countries world wide since 2002. John is also the Director of Search Engine Academy ; Co-director of Training at Search Engine Workshops offering live, SEO Workshops with his partner SEO educator Robin Nobles, author of the very first comprehensive online search engine marketing courses at SEO Training Online and the SEO Workshop Resource Center. I look forward to hearing from you! - Visit John Alexander's Website |
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Dave KurlanDave Kurlan is the founder and CEO of Objective Management Group, Inc., the industry leader in sales assessments and sales force evaluations, and the CEO of David Kurlan & Associates, Inc., a consulting firm specializing in sales force development. Dave has been a top rated speaker at Inc. Magazine's Conference on Growing the Company, the Sales & Marketing Management Conference and the Gazelles Sales & Marketing Summit. He has been featured on radio and TV, including World Business Review with General Norman Schwarzkopf, in Inc. Magazine, Selling Power Magazine, Sales & Marketing Management Magazine and Incentive Magazine. He is the author of Mindless Selling and Baseline Selling – How to Become a Sales Superstar by Using What You Already Know about the Game of Baseball. He created and wrote STAR, a proprietary recruiting process for hiring great salespeople, and he writes Understanding the Sales Force, a popular business Blog and is a contributing author to The Death of 20th Century Selling and 101 Great Ways to Improve Your Life, Volume 2. - Visit Dave Kurlan's Website |
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