I’ve just read an alarming report that says you could be paying 83% over the odds for your pension!
That’s quite some figure.
I was expecting to read about some tax loop-hole that we’ve been missing, but no. This massive under-achievement is purely down to the greed and monstrous inefficiency of the UK pension fund industry.
According to a report by David Pitt-Watson, senior adviser to Hermes Fund Managers, “if a typical British and a typical Dutch person saved the same amount of money for their pensions, the Dutch person will end up with 50 per cent more income in their retirement.”
Scary stuff. But there’s a way to protect your pension pot.
First though, how is this happening?
We’ve all been duped
There is an outrageous amount of scalping of vulnerable pension holders in this country, according to Pitt-Watson.
And he should know. Pitt-Watson helps to manage the country’s biggest pension scheme for BT. And he has built a reputation on calling out the pension fund industry for its shady practices.
During the glory days of the British pension fund industry most employers provided ‘occupational’ schemes. With these schemes, you get a proportion of your final salary on retirement.
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But with people living longer and the turmoil in stock markets, employers have said they don’t want the risk of providing for all these ex-employees.
They’ve said that individuals need their own fund (into which they’ll contribute too) and come retirement, whatever’s in your fund is what you’re getting. If it’s not enough, then that’s your problem.
The trouble is that once the large company schemes were replaced with millions of small schemes, employees were left vulnerable to high fees and inefficient management of the fund.
David Pitt-Watson, really spells it out for us. He cites the example of a young man that saves for 40 years and ends up with a pension pot of just under £250k. Without paying fees associated with an individual scheme, he reckons the chap will get around £16k a year for 20 years.
Now look what happens when you add in the fees: suddenly, the annual income goes down from £16k to just under £10k… a fall of around 60%. Worse, he’s calculated that some people could end up paying 83% more for their pension through individual schemes.
There are two reasons these tiny schemes cost so much more.
First, each employee needs advice on their fund (usually through an IFA). And from here the IFA usually ‘puts a client into’ unit trusts. These unit trusts charge hefty commissions that end up flowing back to the IFA (for his work with the client) as well as the cost of running the fund… which doesn’t come cheap.
Second, the large employer schemes are what you might call ‘self-insured’. That is, they don’t have to chop and change their whole portfolio as some members reach retirement, or when others die. They stick to a long-term strategy to serve the group of members as a whole.
How you can protect yourself against pension scalpers
Thankfully there is a solution. Internet based pension providers can help us to make the best of the new regime.
You can drastically cut down the costs of providing individual pensions.
You can avoid excessive fees charged by unit trusts. Fees that can cut a pension payout in half!
In my next issue I’m going to give you details on how you can set up a Self Invested Personal Pension (SIPP) and how it can help you to take control of your investments.
So please don’t miss my next issue if this concerns you.
• This article was first published in the free investment email
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