Stakeholder pensions and their charges (a bit confused)

Aureus

Hi,

My friend is starting a stakeholder pension with Legal and General. I've been doing some research to try to find out (1) if L&G represent reasonable value for money and (2) which of the funds they offer would be the best value.

By way of comparison I've also looked at the Aviva stakeholder pension offered via Cavendish, because this is recommended by the Monevator website.

What I've found is that while these products prominently state the annual management charge (AMC) it's impossible to find out the total expense ratio (TER).

What L&G seem to state is that for all of their standard funds the charge (AMC) is the same: 1% per annum. For Aviva there seems to be the same AMC of 0.55% for all of their funds.

This seems strange to me because usually when investing there is a big difference in the fees for different funds. Funds investing in the UK tend to be cheaper, while those investing abroad are more expensive. And actively managed funds are usually more expensive than passive index trackers. So what I'm wondering is:

(a) Are there hidden charges I need to worry about and, if so, how can I find out the real cost (TER) for these funds?

(b) Assuming I don't need to worry about hidden charges, does the fact that all funds charge the same mean that the funds that are actively managed and/or invested abroad will tend to offer better value than, say, a UK-only index tracker fund? (To me 1% for a simple UK index tracker seems expensive)

If anyone has any insights I would be very grateful.

Thanks,

Aureus

dunstonh

What I've found is that while these products prominently state the annual management charge (AMC) it's impossible to find out the total expense ratio (TER).

Pension funds use the TER as the AMC.

What L&G seem to state is that for all of their standard funds the charge (AMC) is the same: 1% per annum. For Aviva there seems to be the same AMC of 0.55% for all of their funds.

You are not reading the charges like for like. You are reading the Aviva contract clean of cost of retail but the L&G including cost of retail at maximum cost.

This seems strange to me because usually when investing there is a big difference in the fees for different funds. Funds investing in the UK tend to be cheaper, while those investing abroad are more expensive. And actively managed funds are usually more expensive than passive index trackers. So what I'm wondering is:

I havent got much recent experience of the l&G stakeholder as it rarely comes anywhere near the top for research. However, the Aviva stakeholder has all the funds at the same charge.

(a) Are there hidden charges I need to worry about and, if so, how can I find out the real cost (TER) for these funds?

The almost certainly is hidden charges to get all the charges on the different funds to come out the same. However, that was largely the point of stakeholder. Not to be best value but to be simple, basic and easy to understand. So, standardisation was part of that.

Rarely do stakeholder pensions make the most sense nowadays. Their time has been and gone and really only appeal to a niche market now (people who want simple, not best. Short timescales or very small amounts).

Aureus

Hi,

Thanks for your post and for responding so quickly.

Rarely do stakeholder pensions make the most sense nowadays. Their time has been and gone and really only appeal to a niche market now (people who want simple, not best. Short timescales or very small amounts).

You may be right but my friend is being offered this pension by her employer (who will be making matching contributions) so I don't think she has any choice in the matter.

To understand the product better I'm interested in getting an idea of how these things work and what the overall stakeholder pension market is like.

You are not reading the charges like for like. You are reading the Aviva contract clean of cost of retail but the L&G including cost of retail at maximum cost.

Could you clarify what you mean by this? In both cases the fee is described as an "annual management charge". Do you mean that the Aviva product is not as cheap as it seems, or that there is cheaper method of signing up for an L&G stakeholder pension?

Pension funds use the TER as the AMC ...the Aviva stakeholder has all the funds at the same charge.

What I'm most interest in is trying to figure out which funds within a stakeholder pension are the best value. It seems to me that if the AMC is identical for all funds then that must mean either that:

(1) The AMC for the simplest funds, like UK index trackers, has been rounded up to make those products unusually expensive (meaning these funds may offer poor value), or,

(2) The overseas and/or actively managed funds have extra hidden charges, in addition to the AMC.

If the AMC is equivalent to the TER I think that would tend to support theory (1). My understanding of a "TER" is that it's the closest thing there is to an all-in figure. I also read one online review of the L&G stakeholder pension which states among it's criticisms that

charges look expensive versus an ISA if you only opt for tracker funds, but that currently holds true for all stakeholder pensions.

dunstonh

You may be right but my friend is being offered this pension by her employer (who will be making matching contributions) so I don't think she has any choice in the matter.

"Free" money trumps everything.

Could you clarify what you mean by this? In both cases the fee is described as an "annual management charge". Do you mean that the Aviva product is not as cheap as it seems, or that there is cheaper method of signing up for an L&G stakeholder pension?

It depends if they are being compared like for like. The Aviva one is the cost if nil commission. The L&G one is with full commission. Which is it that applies?

What I'm most interest in is trying to figure out which funds within a stakeholder pension are the best value.

It doesnt matter. They will likely be all the same charge. That simplicity was part of the stakeholder objective.

AlexPQM

If the employer is offering matching contributions it's a no-brainer. Your friend should definitely go for it and opt of the highest matching level possible.

DavidLaGuardia

Aureus wrote: »

Hi,

(a) Are there hidden charges I need to worry about and, if so, how can I find out the real cost (TER) for these funds?

TER is unfortunately not the whole deal, its just an estimate of expenses incurred on the fund combined with the AMC.

The cost of investing excluded from this covrs things like stamp duty on the purchase of shares and the spreads paid in the markets (differenct between buying and selling prices), so for one thing the frequency of trading and the inflows and outflows to the fund all have an impact.

As has been said though, if the employer is offering free money, it's a no brainer.

salop

Stakeholder Funds versus ISAs ? You don't get a leg up by gov't swelling your fund by 20% (dependant on your tax rate) when buying an ISA do you? Stakeholder Pension does!
Stakeholder Pensions charges are simple, around a mere 1% (some less) per annum. Also worth looking at what selection of funds your provider offers and how easy it is to switch. For example some offer British Equity, Treasury fixed Interest and Cash Fund.
There was a golden opportunity to switch into fixed interest when Quantititve Easing commenced as this gave Treasury bond prices a huge boost and some Stakeholders will have profited around 50%! Now Quantitive Easing is phasing out and FT100 has turned downward canny Stakeholders will be in Cash Fund waiting for the next opportunity.
Crunch time comes or did hithertoo when Gov't obliges you to take your nest egg and buy an Annuity! Under £18,000 though is regarded as "trivial amount" and can be taken as cash. So Stakeholder deal is well worth considering below that threshold! Suitable for small personal pension amount? The "Annuity Crunch" hopefully will be scrapped and more flexibility of choice will appear eventually. (because there are an aweful lot of disgruntled pensioners questioning Gov't rules on annuities)

jamesd

salop, what more flexibility do you want for annuities? It hasn't been necessary to buy one since the last Labour government introduced Alternatively Secured Pensions for those over 75 in April 2006. From then anyone could enter income drawdown and stay in it for life.

salop

OK jamesd, So any pensioners conned into taking worthless annuity are misguided since 2006? Argghhhh!
Stakeholder Pensions certainly were a breath of fresh air when they first appeared.
Previously for years personal pension providers were ripping off clients with hidden commissions and charges. So much so more than half their pot was stolen before some pensioners retired!

Linton

salop wrote: »

OK jamesd, So any pensioners conned into taking worthless annuity are misguided since 2006? Argghhhh!
Stakeholder Pensions certainly were a breath of fresh air when they first appeared.
Previously for years personal pension providers were ripping off clients with hidden commissions and charges. So much so more than half their pot was stolen before some pensioners retired!

Annuities arent worthless. Their guarantee has a valuable role to play as it can ensure one's minimum acceptable standard of living will always be met, no matter how long one lives and what happens to the stock markets. Furthermore I believe many people just want a known income that will be paid into their bank account without the need for them to be involved in actively managing their finances or paying someone else to do a bespoke job. So IMHO they are probably the best choice for the majority of retirees.

dunstonh

OK jamesd, So any pensioners conned into taking worthless annuity are misguided since 2006? Argghhhh!

Not at all. The ASP was a nightmare and it was the changes last year that abolished that which really made a difference.

Stakeholder Pensions certainly were a breath of fresh air when they first appeared.

But served their purpose and things have moved on and stakeholders now often no longer look like best value.

Previously for years personal pension providers were ripping off clients with hidden commissions and charges. So much so more than half their pot was stolen before some pensioners retired!

That is what the media will have you believe and there is some truth that some old plans had higher charges. However, there are also some pre 2001 (pre stakeholder) plans that have very low charges and there should never be the assumption that old is bad. I do a lot of pension transfers and often find many of the older plans can be beaten by modern personal pensions but are often cheaper than stakeholder.

It really depends on when the original pension was bought. It's pricing may have been based on a high inflation, boom/bust economy or it may have been priced on a low inflation, steady economy.