Smoke and mirrors – revealing the tricks of the trade for pension charges

4th October 2013

We have written before about the way certain pension providers charge a lot of money for their pension plans.  The topic is, once again, on the media’s radar with interesting stories both on Moneybox and in the Telegraph in recent weeks. Much of what was said applies to only a few people but there is no doubt that the fees charged for pensions and investments are poorly understood and often very difficult to check.

There are three elements to the charges that you pay for your pension (or any other investment):

  • A payment to the adviser, which you can pay directly or arrange for it to be levied via the pension using a process called customer agreed remuneration.
  • A payment to the pension provider for the administration of the pension plan.
  • A payment to the manager of the underlying fund.

In an ideal world it should be very easy for you to establish the nature and cost of each of these elements, indeed this is the case for many current pension contracts (in particular those established after 1st January 2013).

Unfortunately, when it comes to older pension plans, the figure you are likely to get if you ask for details of the charges is the “Annual Management Charge” or AMC.  This is the first ‘smoke and mirrors’ trick, because often the AMC does not include all the charges that will be applied.

In the past some pension plans would include other ways of manipulating the charges to the benefit of the provider and the detriment of the investor.  Additional charges might take the form of:

  • A monthly policy fee which is deducted from your fund.
  • An initial period of “reduced allocation” or “nil allocation”, which means that during that period some or all of your premiums were retained by the provider rather than invested on your behalf.
  • An initial period during which your premiums bought “initial units” or “capital units” which are subject to a higher annual management charge throughout the life of the plan. Such plans were amongst the worst offenders of the old school smoke and mirrors brigade because initial and capital units are often subject to high penalties if you decide to transfer your pension fund elsewhere.

The combined effect of all these charges is that a startling proportion of your pension contributions could be funneled away over the duration of the contract.

Sadly some people have had (and may still have) very expensive pensions. They have become disillusioned and have given up on using pensions as a means for saving up for their retirement.

While this is understandable it means that they are missing out because the modern generation of pension contracts are among the most attractive ways of saving for the long term due to their massive tax advantages.

If you have questions about how you find out what your charges are (or what they could be), or if you want a pension review to find out ways that you can save more effectively, please call us. We offer an initial meeting without charge or obligation.