Pension charges

andy990

I wonder if anyone can help me get to grips with my pension charges? I've been speaking to my provider today and, maths not being my strong point, I'm in a bit of a muddle.

Here goes. They told I me they charge me £6.16 per month plus the following yearly charges:-
7.25 units per year (capital units)
0.75 units per year (accumulated units)

At the moment I have:
293 capital units with a bid price of £4.26
482 accumulated units with a bid price of £20.27

As an example, the lady on the phone said I would work out the capital unit charge as follows
293 x 7.25 divided by 12. I get this to 177.02 but she says you move the decimal place so its 1.77 (not sure why the decimal place moves?). She said you then x this figure (1.77) by the bid price £4.26 which will give you your monthly charge, i.e £7.54. Does this make sense? And why does the decimal place move?

Am I missing something?

Can anyone help point me in the right direction?

Thanks
Andy

plonkee

It looks like its somehow 7.25% of the units held, as in effect you are doing 293x7.25/100 = 21.24 which you then divide by 12 to get the monthly number of units as 1.77 and then multiply by the bid price to get the monthly charge.

In any case, the capital units sound very expensive.

dunstonh

Anything with capital units needs to be reviewed. These old style contracts can still provide long term advantages as a few have very low annual management charges. However, very many are obsolete when compared with modern plans so I suggest you do a cost analysis to see how yours compares. And as always, look at the investment options available as investment is more important than charges.

EdInvestor

I've been speaking to my provider today

Allied Crowbar I presume?

andy990

Thanks guys/gals.
It is actually an Irish Life policy that is now managed by a company called Countrywide Assured. I understand that it's invested in a closed fund (not open to new business?) and I suspected its not performing too well, hence my investigations into charges, etc. I don't pay an awful lot into it (57 per month) so I'm thinking I'd be better transferring it's current value (11K less the 1K they want) elsewhere. Problem is where do I stick it? Guess I'll have to do some reading up!

bigbloke45

Andy, I'm afraid that there is no such thing as a "Capital Unit"; it was a phrase invented by unit linked life companies to disguise what they were really doing! The explanation involves a bit of maths but the underlying principle is simple and involves the idea of "present value". This is merely the amount that you would have to invest today, at an assumed rate of interset to produce a future required amount.

In Irish Life's case they are making an annual charge of .075% plus an additional "capital unit" unit charge of 7.25%, but here comes the clever bit, what they REALLY do is to calculate the "present value" needed to produce the SAME amount at maturity that an ordinary "accumulation" unit would grow to if it had an extra 7.25% being taken off each year. So, for example, if you had 20 years to go to retirement, they would only need to invest 25.24% of your first year's contributions in order to produce the same amount of fund at retirement as an ordinary non capital unit would produce if it had an extra 7.25% being taken off each year. And guess what! that's exactly what they do! plus abit more "jiggery pokey" with the present value of all the other annual charges as well.

This also means that your transfer penalties are built into your pension, as they represent money that was never invested in the first place. This means that you have a very expensive policy and that most of the charges have already been taken. So don't worry about the transfer penalties, just get out into a modern, low charged pension.

Don't bother going back to Irish Life and asking how the charges are really calculated, they won't tell you mainly because most people in the pensions business DON'T KNOW how their policies work.

EdInvestor

Be prepared for a swingeing exit penalty, as these policies often deduct all the charges you would have paid to maturity when you leave early.It's still usually better to bite the bullet and go.

dunstonh

Sometimes you have to take a step backwards to go two forward.

purch

This also means that your transfer penalties are built into your pension, as they represent money that was never invested in the first place. This means that you have a very expensive policy and that most of the charges have already been taken.

Sorry to barge into this thread with my "olde" bugbear of a dilemma....

My Allied Dunbar FSAVC set up in 1990 has an "alleged" value of about £105K and a transfer value of about £90K...I understand why the difference in values exists....my dilemma is

When it reaches the policy retirement age of 55 ( in 1990 I was earning truckloads and expected to continue to do so :eek: ) do all those transfer penalties disappear ??? .....and most of all is the TRUE value of this policy the value of the funds or the transfer value

In other words do I lose by moving the policy now......or will I still lose the same by holding to maturity ???

bigbloke45

purch, the "true" value of your Allied Dunbar" pension is the transfer value at the current date. At age 55 , if is the age to which the policy was written, the transfer penalties will have disappeared, this is because the extra capital unit charge is added back each year until maturity This means that,technically all of your first two years contributions will have been invested, but NOT until the final year of the policy.

But please don't beat yourself about this, it was standard practice back in 1990. Your Allied Dunbar salesman would have been told that all of your money was invested and that capital units were "good" and accumulation units were "even better".

But let me ask you this; in 1990, Commercial Union Life (and a few others) had what was called "front end loaded" plans. Typically, they would only allocate 60-70% of your contributions in the first 2 years as they needed to pay commissions upfront from your premiums. Would you have bought one of these? I suspect not. But the result would have been very similar, only you would have a transfer value equal to the fund value which would have been lower than the "alleged" value you have with Allied Dunbar.

If you would not have bought a front end loaded plan, then you would not have about £90k to play with. It was always about policy design and Marketing Actuaries are very clever people.

So, with all the above out of the way, why don't you do some research about investment returns and think about transfering for investment reasons and not transfer penalties.

I hope you don't dwell on this as it is the past. Please remember that we are all very good at forgiving those about us for their perceived errors, but sometimes we need to forgive ourselves as well!

andy990

Thanks for the advice everyone, I will lose about 1K of the Irish Life policy's value by transferring but I'm going to bite the bullet and do so. Cheers