Three reasons why you should review your pension contracts
According to the insurer LV=, the UK worker will change jobs every five years on average. Assuming you have a new pension for every job, the average 50-year-old will have accumulated six pensions. Below are the top three reasons why you should review your existing money purchase/defined contribution Pension Contracts.
Reason one – high charges
The first few pensions you will have taken out will probably date back to the 1990s when charges were astronomical compared to today’s market. Typically, you would be paying around 1.5% annual management charge (AMC) plus around £2-£3 pm policy fee, and have initial units, relating to the first two years’ premiums with even higher charges associated with them. A particularly guilty pension provider for high charges was Allied Dunbar – now Zurich Life, so if you have one of those, you should be seeing a red flag right now.
However, please don’t rush out and move these pensions without taking advice first – it was common in those days to have guarantees written into the policies (now known as Safeguarded Benefits) which might still be valuable to you.
Charges came down in April 2001 with the introduction of Stakeholder pensions. With AMC capped at 1%, this was changed to 1.5% in April 2005.
However, the more recent introduction of Workplace Pensions has made the market even more competitive, with AMCs below 0.5% for those with larger funds.
Another reason you might have high charges is if you are in a SIPP. A SIPP is a Self-Invested Pension Plan. They allow you to invest in direct shareholdings, use the services of a Discretionary Fund Manager or purchase commercial property. SIPPs usually have higher charges than a Personal Pension (PPP) or Stakeholder Pension (SHP) to reflect the fact that they are more sophisticated. However, I see far too many clients who have a SIPP and are invested in collective funds that can be accessed far more cheaply in a PPP or SHP, so if you have an expensive wrapper holding an ‘off the shelf’ fund, you are paying over the odds.
Reason two – fund performance
Whilst funds you were recommended 5, 10 or 20 years ago might have been flagship performers at the time, they could now be lacklustre. This may be due to changes in the fund manager or investment stance.
Another common reason for underperformance is the myriad of pension providers that have been taken over and closed their funds to new business. A closed fund has little incentive to outperform the market as they are not trying to attract new money. They are very unlikely to have a star manager with an outstanding track record. In addition, it has to fund new purchases and exits from the fund by selling other holdings as there is no new cash coming into the fund. This will make it a bit sluggish to respond to opportunities in the market.
Reason three – risk profile
As we get older, and retirement becomes more of a reality, our attitude to risk tends to lower, as we have less time to make up for any losses in the markets. You need to regularly review your risk profile and ensure that the funds you have invested in match the level of risk you are willing to take and the timescale you have until retirement. Whilst 100% in Equities might have been appropriate for you at the age of 25, it almost certainly isn’t the right thing within five years of retirement.
You should also review any pensions which have ‘life styling’. This was the standard practice on employer-sponsored pensions. “Life styling” automatically started dis-investing your pension funds the nearer you got to retirement. It did this in order to end up fully invested in gilts at your retirement age. This is because annuity rates are based on gilt yields, and so by investing in gilts, you were protecting yourself from stock market falls and locking into annuity rates. However, with the popularity of Flexi Access Drawdown, many clients are now staying invested for 20 or 30 years beyond retirement, and so need some stock market exposure to get the best out of their pension funds, albeit at a lower level than when they were working as they won’t have the resources to make up for big falls in the market.
Conclusion on why you should review your pension contacts
Even if you are contributing at a good rate into a current scheme, and know that you are funding at the correct level in order to fund the retirement income you desire, or if you are contributing the most you can afford and can’t put any more into a pension. These three reasons should demonstrate that you still need to review what you already have, especially if you haven’t done so for the last few years. You wouldn’t sail the Atlantic without checking your compass at regular intervals, and nor should you plan for retirement without reviewing your plans at regular intervals.
- Three reasons why you should review your pension contracts - October 21, 2022
