Moving from "with profits"

jacggors

I have an old private pension that my parents started up for me. When they stopped contributing into it, I was supposed to take over the payments but didn't at the time... I'm now older and wiser and trying to sort out making my own pension contributions.

I'm not able to carry on contributing into this fund because there were a few years of no contributions. I've sought the advice of an IFA, he's suggesting moving this into a new fund. The old one was a "with profits" pension, he's suggesting that I should move the whole thing into a new more modern and more flexible pension fund. I pushed him on how certain we can be on the move being a good thing for the pension pot (rather than leaving that where it is and starting a new one separately), and he was then saying there's no sure-fire way of knowing, either could be better than the other. The old one has done fine and could do fine, it has some kind of bonus which does add to the value, so in some ways it's better. But if it was his pension pot, he would make the move, a new pot will probably do better (more dramatic ups and downs, but overall should increase more in value over time)

To make this move I will have to pay him quite a lot of money, which means he profits from me making the move as opposed to just starting up a new fund and leaving the old one where it is. And he doesn't seem dodgy as such but I'm slightly wary of financial adviser and people in financial services generally...

I'm not knowledgable in these matters, what do people here think? I have no idea what a "with profits" pension is, am I throwing a good thing away by moving everything? Or should I just trust his advice?

dunstonh

I'm not able to carry on contributing into this fund because there were a few years of no contributions. I've sought the advice of an IFA, he's suggesting moving this into a new fund. The old one was a "with profits" pension, he's suggesting that I should move the whole thing into a new more modern and more flexible pension fund.

That would be the expected outcome in most cases.   I would say around 4 out of 5 cases.  Unless you have safeguarded benefits or guaranteed growth rates then these old plans are usually more expensive.

I pushed him on how certain we can be on the move being a good thing for the pension pot (rather than leaving that where it is and starting a new one separately), and he was then saying there's no sure-fire way of knowing, either could be better than the other. 

Good to see you are getting a sensible and correct answer.

The old one has done fine and could do fine, it has some kind of bonus which does add to the value, so in some ways it's better.

That doesn't make it better.
Modern investments are unit linked.  You get all the upside and all the downside.  Its all very transparent and clear to see.
With Profits has smoothing.    There are various styles and methods but the most common give a very low annual bonus.   Once given, that cannot be taken away.  Usually it ranges from zero to 2%.    The bulk of the return is in the final bonus.  That is based on the daily returns of the underlying fund.     So, its variable in the same way unit linked investments are.       Usually, there is an element of smoothing where they don't increase the final bonus but the full amount of the gains as they retain some back to smooth out short term loss periods.  Whereas the unit linked funds don't do that.  

Many WP fund based pensions have a variable annual charge.   They increase their annual charge during periods of good returns.  Whereas unit linked funds do not.

When you say the old one has done fine, is that just your interpretation of have you compared it to a unit linked fund with a similar asset ratio?

To make this move I will have to pay him quite a lot of money, which means he profits from me making the move as opposed to just starting up a new fund and leaving the old one where it is. And he doesn't seem dodgy as such but I'm slightly wary of financial adviser and people in financial services generally...

The product has no initial fee.  You are paying for the advice.    You are right to be wary of financial advisers as they are sales reps of the company they represent.  However, you are seeing an IFA.     They represent you, not their employer or linked company.   

It is also likely that the ongoing costs on the modern plan are cheaper.     Most WP based plans are 1-1.5% p.a. (excluding adviser charges).   A decent low cost pension with low cost funds would be around 0.3% pa. (excluding adviser charges).    

MEM62

Firstly, be sure that he is an IFA and not an FA.  With that established he is working for you and is paid to make decisions that are suitable for you.  Older policies are more restrictive and less flexible and it is likely that, at some point, you would be motivated to move this to a more modern plan.  On the subject of returns, of course an IFA cannot predict whether different investments will perform better or worse than the current one but that is not his job.  His job is to ensure that the investments he recommends are suitable for your circumstances and risk profile.  

jacggors

Thanks so much for your detailed response dunstonh, that's most helpful. I don't believe I have safeguarded benefits or guaranteed growth rates with the old plan.

The "old one has done fine" are his words, although the fine isn't said as "incredible", the tone of voice implies more "OK"!

Thanks MEM2, really appreciate your input too because I've just checked and he's a financial advisor, not an IFA. Sorry for my misleading first message. As I said in that message I'm not very switched on about these things, but I assume from what you've said there's a big difference between the two, perhaps even a legal difference? Could you explain in simple terms what the difference is, and how important it is to go with an IFA? Is the difference important enough that I should now seek the services of an IFA rather than go ahead with the FA? Even if his advice does seem sensible from everything you've both said here.

Qyburn

jacggors said:

Thanks so much for your detailed response dunstonh, that's most helpful. I don't believe I have safeguarded benefits or guaranteed growth rates with the old plan.

The "old one has done fine" are his words, although the fine isn't said as "incredible", the tone of voice implies more "OK"!

Thanks MEM2, really appreciate your input too because I've just checked and he's a financial advisor, not an IFA. Sorry for my misleading first message. As I said in that message I'm not very switched on about these things, but I assume from what you've said there's a big difference between the two, perhaps even a legal difference? .

A Financial Adviser who's not independent can only offer and advise on products from the firm he's representing. 

Albermarle

The advice from a FA should be sensible, as like IFA' s they are controlled by strict rules on offering advice and can be sued for bad advice. However they can only recommend products/solutions that the company they work for offers. These will tend to be a bit more expensive in the main.

LHW99

And at least one company of FA's work out to be quite a lot more expensive than using (many) IFA's

jacggors

LHW99 said:

And at least one company of FA's work out to be quite a lot more expensive than using (many) IFA's

Hi LHW, what does this mean? Sorry I'm not following what you're saying.

Thanks Qyburn and Albermarle.

He would be taking £3000 as a one-off fee for transferring the plan from the old plan to the new one, is this reasonable? This is on top of the (much smaller) percentage-based fee the pension company is charging for starting up the new product and moving this old plan into it. IIRC he would also then take 0.5% of the fund's value every year for managing it. The fund is currently worth around £220k.

MallyGirl

That is a reference to a firm called St James Place (SJP) who have lovely glossy brochures and slick sales reps but are expensive.

if you just want to transfer to another pension and are happy to DIY then the transfer would be free. If you want an IFA to manage things for you then there would be a cost - initial setup and then ongoing advice if you want ongoing. I have no idea on costs as I DIY but I would start by finding an IFA.

jacggors

Thanks Mally for explaining and for the advice. I feel I understand so little I'd be on dangerous territory DIYing, but I appreciate your comments about an IFA and I assume they could even be cheaper than I've been quoted from the FA (who isn't from SJP by the way)

xylophone

Are you currently contributing to a pension?  Had you considered a transfer in (if the scheme would accept)?