Personal Pension transfers and you

Wednesday, 13th May 2009 16:49 - by Resident IFA

Back to Personal Finance today! I am currently advising a Client who has a Personal Pension with one of the major players in the Personal Pension market. His Accountant suggested he talk with me to review his Pension and Life Insurance provision. The crux of the matter is that the Pension contract in question is what I describe as ‘old-style’. By this, I mean that the charging structure is pretty Draconian, whereby the provider still takes 5% (‘Bid-Offer spread’) from each contribution. The majority of modern Pension plans have a simple charging structure. For example, they may simply have an annual fund management charge (AMC) in connection with each available investment fund - the Pension provider’s profit gleaned from a loading (i.e. 0.1%) on the AMC. Some of the important considerations when assessing the suitability of an existing plan/potential benefits from transferring the plan are: o Projected Pension fund value at the plan/individual’s nominated retirement age o The charges on existing and alternative Pensions o Other benefits i.e. Guaranteed Annuity Rates (A guaranteed level of income at retirement per £000 of fund) o Investment fund choice o The individual’s attitude to investment risk o The individual’s financial/lifestyle goals. Do they still want to retire at the existing plan age? What level of income do they require? What other monies do they have available now and possibly at retirement? Can they enter an occupational Pension scheme and will their employer contribute? Etc., etc. Combining all these factors (and more) in constructing a logical and coherent review of a Pension plan can easily drive an Adviser to distraction! For the aforementioned Client, I am recommending a transfer to another provider. Why? The projected retirement fund values were similar between the existing and alternative providers and he is invested in a fund that proffers a guaranteed 4% bonus per annum, with no chance of capital values falling. It’s not getting better, is it ?! Again, why transfer?? Two highlights are: o Access to a far better investment fund choice. He only has the option of 12 internally-managed funds from his existing provider...the alternative option gives a choice of 130 from the provider and ‘external’ specialist fund managers i.e. Invesco Perpetual and Lazard. o The effect of the 5% charge mentioned above is exacerbated when the regular contribution is increased fairly substantially (the case here). Re-visiting the projected values in light of this knowledge makes the existing Pension plan pale in comparison to alternative (modern) providers. I will leave it there for now, but I could go on and on. You get the gist...look carefully at (review) all aspects of your existing Pension plans and look twice as carefully at any recommendation to transfer to a new provider. As always, you could do worse than starting by seeking the advice of an Independent Financial Adviser (IFA)!. Until next time...