Stay with the Pru or Move to Pastures New? (that rhymes!)

MuddledOfMiddlesex

Hello there,
I hope some of the experts on here might be able to give me some very general pointers as I am bamboozled. I'm 37 and I've just taken redundancy from a large organisation to go self-employed - as I wasn't eligible for their final salary scheme, I'd been paying into their Group Pension Scheme, a money-purchase scheme run by the Pru, with no charges but a very limited range of 12 funds. With my contributions and my contracted out, I have a fund of about £37K.

I decided to take some financial advice and the guy I've been dealing with seems very nice and straightforward but I am still a little bamboozled, especially about fees etc. Obviously at the moment I am not paying any fees but the fund I have my pension in performs pretty poorly and there's not much choice. He is suggesting a new Scottish Equitable Flexible Pension Plan, which has a fee of around 1% for its own funds, rising to about 1.5-1.8 for a good range of outside funds (this falls after 10 years and I get a 10 year bonus, I guess if they don't change the rules) - and access to a full SIPP if needed. On top of that, I'd be paying 0.5% to the IFA for managing it all, I guess making sure I am not completely stuffed if the market changes.

I suppose I feel nervous about moving from somewhere where I pay nothing in fees to something where I could be 'losing' 2 % per year, even though the IFA says the flexibility and active management ought to more than compensate. Any pointers? I don't think I have the knowledge or energy to do a proper self-managed SIPP as I am building up my business. I also have 10 years of deferred benefits from a decent final salary scheme though I work in an area where I don't think I will ever fully 'retire' which is probably just as well...

Can anyone suggest how I should be seeing these options?

Many thanks,
Muddled of Middlesex

EdInvestor

2% is way too much, 1% is the maximum you should pay in these days of low returns.

I would suggest you set up a low-cost online Sipp with a discount broker charging no annual fee and then choose some funds to invest the money in - and then just leave it alone.

The only problem is that if the funds has "protected rights" money in it,you can't yet move that into a Sipp, this is expected to be possible from next year.

In the meantime perhaps you can do a switch to some better Pru funds to improve performance? What funds are available?

dunstonh

The Scot Eq FPPP is a low charging contract that can beat stakeholder pensions with terms of more than 20 years to go. It is a multi-charge contract and you cannot look at the annual management charge alone. It has bonuses (rebates in effect) at various periods which would improve the reduction in yield.

With this plan you should not look at annual management charges but look at reduction in yield instead.

MuddledOfMiddlesex

Thank you both for replying...still feeling somewhat baffled. I understand what you're saying, Ed, but I am unsure which of the 12 funds Pru offer I ought to switch to anyway, which is partly why I went to an IFA in the first place.

I like the guy who has been advising me but haven't used him for anything else and, having been badly burned by an endowment, I feel concerned that this small-ish pot could dwindle to nothing to serve his commission. Yet we agreed that he would do the work in return for commission so I guess if I don't go ahead he has a fair argument to want a fee from me anyhow.

Dunstonh, it sounds as if you think this plan isn't a bad one - how do I go about working out reduction in yield. I won't even be thinking of retiring for 29 years I guess (what a thought!) so predicting the future is rather tricky.

dunstonh

Dunstonh, it sounds as if you think this plan isn't a bad one - how do I go about working out reduction in yield. I won't even be thinking of retiring for 29 years I guess (what a thought!) so predicting the future is rather tricky.

I do around 300 pensions a year (mostly pension transfers) and have used it once in the last 12 months. It certainly isnt a favourite of mine but I tend to use higher quality products such as hybrid/full SIPPs or personal pensions with larger fund ranges as I focus on investment quality rather than cheap and cheerful. That said, a lot of IFAs do use it because of the lower charges over the term and if the focus is on charges rather than investments, then it can be good to use then.

The reduction in yield is shown on the illustration. It will say something like... putting it another way, the impact of charges will bring investment returns of 7% down to 5.9% (or words to that effect). Its normally on the last few pages. On a multi-charge contract like this, that is the only reliable way to look at the real charges. Remember this plan has something like a 6% bonus in year 10 and then a yearly bonus thereafter. So looking at an annual management charge alone is not a good idea.

Only word of warning though. A commission hungry IFA could increase their commission to eat up those extra savings and make it only a little cheaper than a stakeholder. A stakeholder would have a reduction in yield to around 5.6-5.9%. I would expect your proposed plan to be around 6.2-6.3%

EdInvestor

Just to demonstrate how the reduction in yield and impact of charges works, if you invested your 37k for 28 years to retirement and it got 7% growth with no charges, your return would be 246,007.

At 1% charge, this would reduce the yield to 6% and your return would be 189,132.

At 2% charge the yield is reduced to 5% and the return would be 145,045.

A figure of 1 or 2% looks small but it has a very big impact over a long period.When you realise this, it makes the idea of investing direct with no charges rather attractive.

[These figures apply to any investment, whether in ISA, pension or direct. Tax relief is not relevant, as although you receive it on the way in, most of it is extracted again when the income is taxed on the way out.]

whiteflag_3

dunstonh wrote:

It certainly isnt a favourite of mine but I tend to use higher quality products such as hybrid/full SIPPs or personal pensions with larger fund ranges as I focus on investment quality rather than cheap and cheerful. That said, a lot of IFAs do use it because of the lower charges over the term and if the focus is on charges rather than investments, then it can be good to use then.

Dh while I generally agree with your general overview of the FPP , what exactly are you talking about when you refer to "higher quality products" rather than cheap and cheerful?

I would have thought the FPP qualifies as a hybrid SIPP given that it has a SIPP option?

dunstonh

I would have thought the FPP qualifies as a hybrid SIPP given that it has a SIPP option?

Has it? I hadnt noticed. I am on a boycott of Scot Eq products at present due to really bad service.

Dh while I generally agree with your general overview of the FPP , what exactly are you talking about when you refer to "higher quality products" rather than cheap and cheerful?

I generally prefer direct investment into unit trust funds rather than using pension mirror funds. If you look at Fid Spec Sits unit trust and then compare it to the insurance company versions you will see that they all have different performance to the real fund which is usually less. (picking on spec sits as an example only as it equally applies to others).

Also, I tend to include sectors/funds which you just dont get on the average stakeholder/personal pension.

Cautious investors though can still find value in stakeholder/personal pensions as that is an area that the insurance companies tend to be quite good at.

Richard_III_2

EdInvestor wrote:

The only problem is that if the funds has "protected rights" money in it,you can't yet move that into a Sipp, this is expected to be possible from next year.

Interesting. Where did you find this out? Is it actually going to happen?

I have a long standing Scottish Amicable With Profits pension (doh!). This is now (was always) a poor performing/restricted pension with the Pru.

Earlier this year I looked a gift horse in the mouth and took the last opportunity to join a final salary pension scheme. This co-insided with the relaxation of the pension rules, allowing you to have both company and personal pensions. This triggered me to review my situation and I decided to look at doing something with the Pru pension. I'm trying to learn from past mistakes and am trying to spread my pension (risk) around a few more pots (don't trust the likes of thieving GB and his ilk)

I spoke to one or two people who were prepared to discuss their pension planning. I looked at a couple of Stakeholder pension providers. Some seem to be quite good, low charges but have restricted funds. SIPPs seemed to offer a far larger range of funds, but they didn't allow the transfer of 'protected rights' (I'll take the money now, rather than trust it'll be there in the future!)

What are the pro's and con's of transfering a personal pension?
Are transfers to a new provider, front loaded with crippling charges. I seem to recall TV documentaries about this many years ago. Probably the reason I haven't switched anything. When I started my pension, my first couple of years contributions went straight out as commision to the IFA.

dunstonh

Interesting. Where did you find this out? Is it actually going to happen?

Protected rights cannot be moved into full SIPPS as they are unregulated. From next April, they should become regulated and the knock on effect is that it should allow them to accept protected rights payments.

I looked at a couple of Stakeholder pension providers. Some seem to be quite good, low charges but have restricted funds.

Thats the problem with stakeholder pensions. Great if you are low risk and got a few years to go to retirement or you are already in retirement but for the long term, the funds available are not normally upto the job. Cheap but you get what you are paying for.

SIPPs seemed to offer a far larger range of funds, but they didn't allow the transfer of 'protected rights' (I'll take the money now, rather than trust it'll be there in the future!)

Hybrid Sipps do and its where I currently have mine sitting.

What are the pro's and con's of transfering a personal pension?

You should do a cost analysis between old and new. Generally known as a TVAS. You then need to compare benefits and guarantees that may exist on the old one that may exist and which will be lost on transfer. You should also check fund availability on the old plan as you could build the portfolio within the old plan. Especially if there are guarantees or lower charges on it.

When I started my pension, my first couple of years contributions went straight out as commision to the IFA.

That was normal with every distribution channel pre 2001. Even if you had bought direct and bypassed advisers, the companies kept it for themselves.