New Pension World

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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