Workplace stakeholder issue

Milarky

Something I did not appreciate before receiving my very first workplace (matching employer contribution) based stakeholder pension annual statement.

The tax relief on (my) contributions does not appear instantly - it has to be claimed by the pension company and is only invested in the plan some time later. In addition, deductions from payroll aren't forwarded instantly - they only have to be received - thus starting the reclaim process - by the 19th of the next calendar month. Putting these two factors together and you get some pretty impressive delays

Contribution..........Recieved(days+)...........Relief Claimed(days+)
Date
28/07/06...............02/08/06..(5)...................21/09/06..(50)
25/08/06...............26/09/06..(32)..................21/11/06..(56)
22/09/06...............28/09/06..(6)...................21/11/06..(54)
20/10/06...............26/10/06..(6)...................21/12/06..(56)
17/11/06...............23/11/06..(6)...................22/01/07..(60)
15/12/06...............03/01/07..(19).................21/02/07..(48)
12/01/07...............18/01/07..(6)...................21/03/07..(62)
09/02/07...............20/02/07..(11)..................21/04/07..(60)
09/03/07...............15/03/07..(6)...................21/05/07..(67)
06/04/07...............18/04/07..(12).................21/06/07?.(64?)
04/05/07...............04/06/07..(31).................21/07/08?.(47?)
01/06/07...............06/06/07..(5)...................21/07/08?.(45?)

The above pay cycle is 4 weekly (not monthly) so this would have some effect where the provider is claiming monthly and operate a cutoff (of about 6 weeks it looks like). '?' is used where the refunds are not even shown on the annual statement btw

However the main points are that all payroll deductions are subject to delay (of up to 50 days if paid on the 1st of each month, for instance) and then some providers (but not necessarily all) may only apply the refund when it is claimed - and there are significant delays possible there.

Of course the perk is the matched employer contribution. But when one's OWN contribution is being held by the employer for weeks at a time - and when one's OWN tax refund is not immediately applied - this starts to add up on the performance of one's OWN contributions. This is not a very good advertisement for workplace stakeholder pensions with no matching employer contribution (compulsorily available since 2001) is currently made.

Personal pension providers do not have to apply the tax relief on the date of the contribution of course, but they tend to do so as a feature or benefit of their plan. I think it would be a shame if what we take for granted is not being made compulsory post 'NPSS'. (Does anyone know if the same sort of regeime will be used for timing payments as at present?)

DavidLaGuardia

Milarky wrote: »

Of course the perk is the matched employer contribution. But when one's OWN contribution is being held by the employer for weeks at a time - and when one's OWN tax refund is not immediately applied - this starts to add up on the performance of one's OWN contributions. This is not a very good advertisement for workplace stakeholder pensions with no matching employer contribution (compulsorily available since 2001) is currently made.

To give you some comfort, the delays here are not necessarily detirmental.

It is not uncommmon to confuse the mechanics of a unit linked plan with a cash fund or some with profits funds where daily bonuses accrue.

If we take a fund based on equities as being the most common fund used in a pension plan, you will be investing at peaks and troughs that occur throughout the year, irrespective of the general trend over a longer period.

Now this is a good thing (here comes a slightly complicated explanation but stick with me) :eek:

Regular investments benefit over this time in terms of not having the risk of investing at the wrong time. Futhermore, a phenomenon called" pound cost averaging" takes effect:
In comparrison to what Regular investments lose when prices are high they gain more when prices are lower than average.

This is clearer if I give a simplified example. Imagine £100 invested every month for three months at the following prices for each unit of the fund:
Month 1: £1.00
Month 2: £1.10
Month 3: £0.90
The average (mean and median) price is £1.00 over these three events so one would expect to have 300 units for £300.

In fact, the number of units are as follows:
Month 1: £100/£1.00 per unit = 100.00 units
Month 2: £100/£1.10 per unit = 90.91 units
Month 3: £100/£0.90 per unit = 111.11 units
Total units bought = 302.02 units for £300
average price bought = just over £0.99 per unit

Hence: As the The money claimed is invested later, it may purchase units at more or less than your own contribution. Not only does this average out over time, but the increased frequency of contribution as to the benefit of "pound cost averaging" as decribed above.

If you are close to retirment and investing in cash, things are different, but in the scheme of things this is a minor drawback.

YorkshireBoy

Milarky wrote: »

However the main points are that all payroll deductions are subject to delay (of up to 50 days if paid on the 1st of each month, for instance) and then some providers (but not necessarily all) may only apply the refund when it is claimed - and there are significant delays possible there.

A subject close to my own heart!

Although my 'refund' is used to buy my units on the same day as my own (and my employers) contributions, I do have to wait more often than not until the 26th-28th of the month following salary deduction for the money to be invested. For example, in the last 12 months 7 of my unit purchases have been made after the 19th of the month. The year before...10 (ten) months payments were made/invested late!!

Now I'm paid on the last Friday in the month (24th - 31st). If I was paid at the start of the month, I'd be spitting feathers!

I have reported my employers, the scheme administrators, the scheme provider (Scottish Life), and the trustees (Royal London) to the Pensions Regulator twice in the last two years - and still no action has been taken.

Now tell me, what use is a regulator that doesn't regulate?!

Milarky

YorkshireBoy wrote: »

in the last 12 months 7 of my unit purchases have been made after the 19th of the month. The year before...10 (ten) months payments were made/invested late!!

As you see, I had one 'late' payment too.

YorkshireBoy wrote:

I have reported my employers, the scheme administrators, the scheme provider (Scottish Life), and the trustees (Royal London) to the Pensions Regulator twice in the last two years - and still no action has been taken.

Now tell me, what use is a regulator that doesn't regulate?!

It's almost a 'deliberately' lax system, isn't it? Rather than a set day in the month, the 'deadline' should have been specified with reference to the pay date (say no more than 2 weeks later). That way employers could not jig payments to suit themselves and every employee would be on a level playing field. We could have this when 'personal accounts' come in in a few years if we agitate our MPs to tighten the system - but will they ever listen? And as you say, complacent regulators are two a penny in the UK these days..

DavidLaGuardia

Simply put:

The delay of of paying something later in the month is unlikely to be detrimental in a unit linked fund. You have little to worry about

purch

The delay of of paying something later in the month is unlikely to be detrimental in a unit linked fund. You have little to worry about

Whilst what you are saying is perfectly correct, and can even have be a benefit depending on the market, I don't think that is exactly the complaint here.

When an employee gets paid the Income Tax and National Insurance has already been deducted. You don't get a choice in the matter.

The fact that the Tax and NI isn't actually paid at that time by the employer is irrellevant to the employee.

Therefore it is wrong that an employee subject the disadvantages of instant PAYE cannot also get his/her Tax relief instantly too.

Whether or not the Pension Fund gains or loses from this is not the point.

DavidLaGuardia

purch wrote: »

Whether or not the Pension Fund gains or loses from this is not the point.

Be that as it may, I think we have people genuinely worried that they are losing out in money terms. I would want to point out that this is not the case to reassure them. If they still want to spend their time the matter on "a point of principle" it is of course their right to do so, but they should know the facts first.

Milarky

DavidLaGuardia wrote: »

Be that as it may, I think we have people genuinely worried that they are losing out in money terms. I would want to point out that this is not the case to reassure them. If they still want to spend their time the matter on "a point of principle" it is of course their right to do so, but they should know the facts first.

As Tesco says: "Every little counts".

Actually I worked out what the first year reduction in yield is (it's a one-off of course) is in my case, assuming the central forecast growth of 7% required for use in illustrations. It's about 0.19% of everything in the year of investment. How that trickles through over a ten year, twenty plan, I can't quite work out but it seems to stay at 0.19% of everything - the final plan value difference - and the pension and lump sums.

Of course the government are 'guilty' of something similar themselves with the NI rebates (for contracted out) paid an average of four months into the tax year - and that's and average of six months after the associate earnings - so that's about 10 months - 0.83 years and around 5% off the potential value of the final pension/lump sums. In that context 0.2% is quite tolerable.

[But David, your point is based on flawed logic - pound cost averaging does not remove a systematic bias against delayed payments - small though their effect may be - neither does it 'amplify' them - it simply leaves them ('on average') exactly where they were - about 0.2% for workplace stakholder and about 5% for gov't rebates which are being phased out in a few years anyway so that means we sharn't have to worry]

DavidLaGuardia

Milarky wrote: »

As Tesco says: "Every little counts".

Actually I worked out what the first year reduction in yield is (it's a one-off of course) is in my case, assuming the central forecast growth of 7% required for use in illustrations. It's about 0.19% of everything in the year of investment. How that trickles through over a ten year, twenty plan, I can't quite work out but it seems to stay at 0.19% of everything - the final plan value difference - and the pension and lump sums.

I haven't checked the figure, but the reduction in yield calculation assumes linear growth. It is fine as a long term tool, but we all know markets are not linear and money paid in later in the month will be as often better as worse compared to the main payment (the gov rebate is bit harsher I agree).