Steve Webb is right in reckoning we would value our personal pension saving more if it were in one big pot. He is right that this would make the job of converting pension saving into an income stream for life easier. He is wrong if he thinks this can be achieved by conventional tranfers.
“Conventional transfers” of DC pots are extremely expensive. That is partly because of hidden charges that crystallise if the savings do not run their full course, partly because of special features written into older saving schemes (terminal bonuses and guranteed annuity rates to name but two), but most importantly- and this applies even to the new stakeholder pensions because of massive investment costs. If you have to buy and sell units as part of the transfer there are transactional costs and usually tax to pay (I hope this isn’t what HMRC have in mind!)
The DWP are consulting the pensions industry on this and I hope they get the message loud and clear, that you will not solve this problem by riding roughshod over these issues.
The legacy charges are typically bound up in an aracane practice known as back end loading. Back end loading involves levying a charge on the first two year’s units purchased which can be as much as 6% per year. When combined with monthly policy fees, it means that these units are not growing , infact many of these units have virtually no value as the 6% return has been a tall order for many insurance company‘s managed funds.
If policies with these toxic units are cancelled, the insurance company is able to take a charge on the non toxic units based on what they could have expected to reap from the toxic “capital ” units.
I cannot make this easy to explain, take it from me, the reason that most small pots are small pots is that the majority of the pot has been grabbed by the insurer to pay the adviser a comission . The money has been spent on Red Ferraris with Cream Interiors and is not coming back.
The better news is that while most of these pension savings accounts have nasty surprises, a few have nice surprises. Sadly many people appear to be missing out on these nice surprises mainly I suspect because the adviser that sold them the policy is not around to explain its features and the insurers who have to foot the bill if you want to exercise your guaranteed annuity or claim your terminal bonus in full, are not devoting a lot of time to helping you.
I mean- do you understand the process of grandfathering tax free cash commutation under a s226 RAP?
But worse. much worse than this, there is simply no way that the process of bringing together all these small pots can be done without vast cost to soemeone. If we ignore the charges and the nice surprises, we may get bigger ports but the big winners will be the insurers who will have their future income streams upfront and can kiss goodbye to a lot of troublesome guarantees that are bunging up their balance sheets. The big losers will be the policyholders.
If we stop and explain what is going on and take care not to lose the nice surprises, we could have spent the entire pot in paying for advice.
And if we have to invent a system where pots can simply transfer “in specie” to central aggragators – then we are talking of a build several times the size and complexity of NEST– which has already worked through £300m+ of our money just to get to base camp.
So is Taps putting a massive downer on Steve’s big pot idea?
No he isn’t. Here is a simple solution hinted at in the title of this peice.
We need a bit of kit that allows a search to be done on all the records of registered pension savings providers in the UK and we need the Pension Providers to sign up to the security protocols to allow this to happen.
What will happen is that you will be able- by providing your name, date of birth and national insurance number – to search for every bit of pension saving you have whether it is with a Standard Life or General Portfolio (who he-ed.).
I am not so ambitious as to suppose you will get a current value from most of the providers, that is way to sophisticated, but you will at least get your policy number and a way of getting a policy valuation.
This links to PICA’s good idea of a pension passport which is trying to get to the same place.
Once we have a system in place where there is an accepted method of getting all the information together in one place , we are only a step from making it compulsory that before any annuities are purchased, to do this information collection exercise.
The sweep up needs to flag all the issues mentioned in this peice- the cost of early policy surrender, the availablity of policy features and any issues around investment costs (including market warnings where member’s funds are invested in highly volatile markets).
I don’t think I am asking too much here. Even the Zomby Life companies have spent enormous amounts on sorting out their legacy systems and I expect to be delighted when they stick their hands up and say- “yup- we can help here”.
I am quite sure that advisers, fed up with having to hunt down policies for clients will give a big thumbs up to this idea and most importantly of all, this does not require a massive spend from Government along the lines of the National Clearing House approach.
What we need is a register of the pension holdings of people in this country who have private pension holdings and a means of interrogating that register using simple search fields (NINO,DOB and NAME).
Just do it!
- Whatever happened to “stakeholder economics”? (henrytapper.com)
- David Mowatt – spot on – the impending pension crisis (henrytapper.com)
- Ticking timebombs in the pension cupboard (henrytapper.com)
- Define your aspiration. (henrytapper.com)
- Aspirational pensions – popcorn pensions!! (henrytapper.com)
- Fair pensions at work. (henrytapper.com)
- Who made that choice for you? (henrytapper.com)
- Selling NEST and auto-enrolment to the pension weary (henrytapper.com)
- Yes pensions minister (henrytapper.com)
- Can we have a word Mr Webb? (henrytapper.com)
- Pensions crisis: one in 10 forced to delay retirement (henrytapper.com)
- Is Auto-Enrolment a busted flush? Pension Play Pen lunch Jan 2012 (henrytapper.com)
- The NAPF point the finger at the £1bn annuity scandal (henrytapper.com)
- Pension provision ‘damaging business insurance holders’ competitiveness’ (premierlinedirect.co.uk)
- How’s this for a rip-off? (henrytapper.com)
- Sorting the pensions of the “squeezed middle”. (henrytapper.com)
- Should pensions be personal? (henrytapper.com)
- Blogging at the NAPF Investment Conference (henrytapper.com)
- Pension Equality? Don’t make me laugh. (henrytapper.com)
- What’s in store for UK pensions in 2012? (henrytapper.com)
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