Legal   

Lower charges - more choice  

When it comes to pensions most of us don't understand much about them. And for many the reality is that that you may have taken one out years ago, and never looked closely at it since. 

There have been many changes in pensions over the years. Stakeholder pensions have been introduced, which has brought about a much lower charging structure for modern contracts. Additionally older contracts may have only offered a limited number of funds, but many newer contracts can offer a wide choice of funds.

So if you have a pension which you have not reviewed for some time, then you should consider the following:-

• Is the charging structure competitive?
• What is the performance of the funds available?
• Have you chosen the right company?
• How will new legislation affect my pension?
• How much should you contribute?

Old Style Charges

Many older contracts have much higher charges than modern contracts. You may not even be aware of what the charging structure is as the fees are taken from your contributions and or fund. Below is a list of charges that applied to some older contracts, and may still apply to your contract.

Bid/Offer Spread - This is a deduction, of usually between 3% and 5% of every contribution

Installation Fee - A fee for setting up the plan, which could have been taken as a cash amount, or a fixed percentage for a number of years

Plan Fee - A monthly or annual deduction. This could be anything from £1 per month to around £5 per month. This charge could even increase each year

Nil or Reduced Allocation - This would be more likely to apply to contracts paid monthly. A nil allocation would be a period of time during which the entire premium would not be invested in your plan. A reduced allocation period would be the length of time during which only a portion of the premium would be invested

Capital Units - Some contracts have both Capital Units and Accumulation Units. The Capital Units could incur a higher charging structure than the Accumulation Units, such as a higher annual management charge (see below)

Annual Management Charge - This is a percentage charge levied against the fund holding. This is typically 1% p.a. or above.

Switching Fee - This is a fee charged when the funds are switched. Some companies offer this free, but some charge up to £50 for each fund switch

By contrast to the charges listed above, many modern contracts only have one charge and that is the annual management charge. This could be as low as 0.25% on new contracts, but typically around 1% p.a.

Funds

The other key issue with pensions, is fund choice and performance. Many contracts have limited fund choice, and poor performance, with little chance of any change in the future.

Closed Funds - Some companies have stopped selling their products. This means they do not accept any new contracts. This means there is less incentive for the funds to perform well, as they no longer have to compete with other companies. Closed With-Profits funds (see below), pose even greater problems

With-Profits Funds - Closed With-Profits pose a real problem and dilemma. The issues are:-

• There is little prospect for growth
• The funds have been switched into poor performing assets
• Those who remain in the fund are unlikely to see any real growth
• There could be a penalty for those who leave
• Many household names have closed With-Profit Funds

Fund Choice - One problem with many contracts is that they offer little fund choice, and the funds they offer may also be poor performing funds.  So not only may you be facing high charges but also:-

• A very limited fund choice
• You may only have access to the fund you're in
• Or you may have access to only a handful of funds
• The funds you have access to may poorly performing funds
• You may be suffering high charges and poor performance

The difference between the best and worst funds, can be staggering, and the difference between charging structures can vary widely. So if you want us to advise you on your pension, and ensure it is in the right place for you, to give you the best retirement possible, then contact us to discuss your requirements.