Something in the air

Milarky

http://observer.guardian.co.uk/uk_news/story/0,,1718181,00.html

John Hutton, the work and pensions secretary, will announce that he has reached an agreement with private pension providers to cut charges - fees levied simply for handling a pension plan - from 1.5 per cent to less than 0.7 per cent.

But we were hoping for '0.3%' from Turner's recommendations - this is 0.4% higher.

The government are entitled to 'cut a deal' rather than adopt the (slightly polictically unpopular) reccommendations of Turner, of course. If this brings lower charges now rather than after 2010 then well and good. On the other hand, if this 'good news' comes with the caveat of lower charges 'eventually' I wouldn't be surprised either....

Can someone explain where they got '25 percent' from? If their basis of comparision are the newer, more expensive stakeholder plans then it can't be a geniune estimate of average gain as many policies won't have these charges now - they will already be sub 1.5% (and probably sub 1%) so it might be something like a cut from 0.95 AMC now to 0.7 AMC - only about 0.25% pa.

I've just done a quick calculation on the assumptions of 7% gross return and indexation of premiums by 3.5% (to allow for increased salaries) over a 40 year period.

A) 10 years at 1.5% reduction in yield (RIY) then 30 years at 1% RIY as per 'new' stakeholders

40 years at 0.7% RIY

So that's

A) 10 years at 5.5% followed by 30 years at 6% compared with

40 years at 6.3%

..and each year the amount subscribed goes up by 3.5% anyway

Result: is 33% greater than A)

Now assume that your charges are only about 0.95% anyway (i.e. you've never paid the 'new' higher AMC since it was brought in) and you would have

C) 40 years at 6.05%

Result: is only 5.5% greater than C)

So to get the figure of 25% they must have assumed that everyone was moving into a stakeholder 'today' and suffering the higher charges rather than modelling the gains on what existing holders of pensions would be paying.

dunstonh

Most stakeholders never moved to the 1.5% for first 10 years but remained on 1% default. The better providers also had fund based discounts and it was possible to get to 0.7% equivalent without much effort if your fund was high enough.

I wonder if the 0.7% funds "for all" will be a single fund solution. i.e. a budget tracker fund. If you want cheap, you get cheap. If you want more, you pay for it.

0.3% was never going to happen. There is no industry that can survive on a margin of 0.3%.

I also wonder if the "new" pension would be taken out of FSA regulation. That would reduce costs straight away. Winners there would be the banks (of course) who could flog the new product from their cashiers and counter staff and accept the lower margins offset by the increased volume.

Be interesting to see how they fudge this one.

EdInvestor

Ah.

It seems we now have the answer to the question about how serious the pension "crisis" is.

Since it can be resolved by the supply of a non-compulsory tracker pension charged at 0.7%, the answer would appear to be "not very serious at all". :rolleyes: