let my pension go
This morning I got this email from John Yeo at the FCA
We have published our final rules on capping early exit charges for consumers eligible to access the Government’s pension reforms from age 55.
From 31st March 2017, early exit charges will be capped at 1% of the value of existing contract-based personal pensions, including workplace personal pensions. Early exit charges that are currently set at less than 1% may not be increased. Firms will not be able to apply an early exit charge to personal pension contracts entered into after these rules take effect.
This is very important news both for employees in a workplace pension scheme and for those employers who have set such a scheme up (as part of auto-enrolment).
It is important as many of us who have been saving for our later life have used what the pension industry call “legacy pensions” and the vast majority of these legacy pensions are not as good as the workplace pensions that we’ve been setting up over the past four years.
Not only are they not as “good”, some of these legacy pensions are positively “bad news”. This is because of the way that their complicated charging structures work. These structures are “back end loaded” – that means that the costs and charges are loaded into the back end of your contracts with an insurer. So when you have the most money in your pension, you find yourself being hit with the worst charges.
I have a pension where I am paying around 6% pa in charges. This is because I only paid into it for three years (back in the 1980s). But that pension is now worth £20,000 meaning I’m paying my insurer £1200pa for virtually nothing, that’s £100pm for sending me a letter once a year telling me the value of my fund is the same or less than it was last year!
What this ruling means is that I will be able to release this terrible pension sometime between now and April 1st of next year for a fee no greater than £200.
My workplace pension only charges me 0.5% pa, so I’ll be paying £100 to my provider, that’s around 1/12th of what I was paying for my legacy pension.
Some legacy pension providers (like Scottish Widows) have decided to jump early and already allow you out of these expensive legacy pension contracts, others (like Zurich) seem intent on hanging on to our money (and their charges) to the last possible minute.
I have been writing to the Chairs of the insurance company Independent Governance Committees asking to hear what they are doing to get the pension providers they govern to give them a timetable for change. The sooner we clean up these mucky legacy pensions the better.
Here is something you can do – assuming you have a qualifying workplace pension that accepts transfers from legacy schemes (they all do apart from NEST and NEST should be able to do from April 2017).
You can write to your staff with the notice from the FCA that I’ve put at the top of this article. You can suggest that your staff can contact the insurance company with whom they have a personal pension and ask it whether the pension is eligible for transfer to your workplace pension.
At this point, I should be suggesting they get in touch with an independent financial adviser to help them, but it may be that the job in hand is not one that an IFA will want to advise on. It may be that the IFA will give advice on the transfer but at a price that makes the transfer un cost-effective.
So I have a Plan-B. If your staff haven’t got an adviser but would like help with how to go about things, they can contact the Government’s Pension Advisory Service (TPAS)
- Address: 11 Belgrave Road, London SW1V 1RB
- Phone: 020 7630 2250
Or you can go their website and book either a telephone conversation or even a video call.
Here’s the address http://www.pensionsadvisoryservice.org.uk/
A lot of people feel powerless to manage their pension pots into one place. They have a right to be, there are a lot of snags and pitfalls along the way. I’ve found dealing with TPAS really helpful, they won’t tell you what to do but they’ll give you a clear path to the decision you have to take that will make sure you are aware of pitfalls and don’t give up any important guarantees when transferring. What is more, their help and guidance is absolutely free.
I’ve written a lot about how employers can help their staff to better pensions. Though I am an advisor myself, I don’t believe in charging people to help them do transactional stuff like transferring legacy pensions to workplace pensions. I think this is work that people can do for themselves. But they need a leg-up from employers.
If you or your employees want to understand how this impacts them, then they might like to give TPAS a ring, web chat or send an online enquiry. This is the Government service that helps employees with their pension questions or issues.
Setting aside the legacy funds – being charged 1% of your capital to access your capital is a disgrace – we are not charged for accessing our bank accounts so why our pensions? And why such an arbitrary number? Why not .5% or .25% or 0!!!
I think there were a lot of people who wanted the figure to be 0%, but this 1% seems to have been a Faustian pact between the ABI and FCA to get this away. I don’t doubt that 1% will come under pressure in years to come. For me – to reduce my exit cost from around 23% to 1% is pretty good!
But your point is fundamentally sound.
I have been banging on about this for years, but, and there is always a BIG BUT, this isn’t as simple as it seems (never is).
You see, in 1996, or thereabouts, with commission disclosure, many “private” pension plans (FSAVC/AVC/PPP/EPP/S32, et. al.) were re-priced to have “front-end” charges with loyalty bonus features. Clearly, many life offices retained “iffy” things such as “initial” or “capital” units, reduced/enhanced allocations, policy fees, bid/offer spreads, management charges, but a few dropped a lot of this “monkey business” and, instead, allocated 35% of the premium to units in the first year then something like 105% from year 5 onward (step forward Eagle Star). Other old policies lose pretty much all charges should the plan go past “selected retirement age”; that can be quite valuable (step forward Allied Dunbar).
On my books, I still have a PPP that was provided by what was then Sun Life (then AXA/Friends/Aviva) that was written to age 55 by a now retired colleague. This has capital units. The client is just about 55, but won’t be using the plan yet. The plan has something called “EFI” (remember Rover 200’s?) – a loyalty bonus mechanism that is actually rather attractive. I put the details of this by now ancient plan into O&M’s “Pensions Profiler” and it came out as top dog if held for another 10 years, which it almost certainly will be.
So, whilst I am all in favour of “bringing everything under one roof”, as Henry is fond of saying, this isn’t always quite the right course of action. I think, in many cases, a proper “audit” of old plans is in order, prior to any action being taken.
There is a real problem with these oddities – all variants of the terminal bonus and I’d put them in the same bucket as schemes with GARs etc. However, these schemes are rarities – thank goodness! I hope that the Sun Life Plan which – with the passing of Axa’s back book to Phoenix, will now fall under the scope of the Phoenix IGC (excellent). However, worryingly- one of the IGCs which governs the workplace plans of one insurer I’m dealing with – doesn’t want to get involved. I think the IGCs have a general duty of care to all contract based plans and will be interested to see how they get involved. I’m pleased to see that the DWP are also planning to ban exit penalties on occ schemes – I wonder if this will be through the Pension Schemes Bill or separate legislation.
My experience with most life office “consolidators” has, to be fair, improved of late. An important thing is that the likes of plan charges and, to a lesser extent, the investment experience are “objective” whilst most people with old pension plans operate in a world of subjectivities and react accordingly.
Bad luck with the penalty shoot-out!
4-2 ! Solihull Moors!
Never mind, I’m from near Exeter!
This is generally good news, but surely for consistency’s sake this means that something needs to be done to bring the charges NEST make on contributions into line. Their 1.8% pa contribution charge is hitting millions of new savers who are only saving very small amounts of money generally and can ill afford this charge on top of their fund charge!