Charges and Flexibility
The deal with personal pensions used to be that there was a balance between charges and flexibility. The more flexible then the more you were charged.
However the arrival of the new Stakeholder pension has changed things significantly and many pension providers are now giving much better deals for personal pensions.
The following comments on charges and flexibility refer mainly to personal pensions. They are relevant despite the introduction of the highly flexible and low charge Stakeholder pension because some people are still opting to start a personal pension (Why? see Personal Pensions vs Stakeholders)
You are charged by the pension providers for running your pension fund. Charges are usually divided into the initial charge i.e. when you buy your pension and then the ongoing charges. These charges are taken from your fund. Charges would typically include:
- The IFA’s fees or Commission. To look at these further see Fees versus commission.
- The pension providers Management set up charges. The exact details are usually covered in the small print and can vary enormously. They are often set on a sliding scale, even though there is no difference between setting up a £1 a month and a £1,000 a month pension). Note: Stakeholder pensions are not supposed to have these set up charges
- Annual Management Charges. These are for running your pension i.e. sandwiches for the secretaries and long lunches for the fund managers. (Ho ho ho).
- Added to these can be a continuing commission for the IFA, which could be as much as an extra 4% to 5% a year, sometimes even if they’ve already charged you fees so do check this.
- Note: Stakeholder pensions charge a maximum of 1% a year (ie if your pension fund has £100 in it the most you can be charged is £1.)
Besides flexibility, charges are one of the main differences between a good and bad pension. Whatever they are they will impact on your eventual pension.
Until recently most personal pension plans tried to take most of the charges in the first year or two, both as a way of getting the money quickly, but also to encourage you to stay with them.
If you stopped your pension within two or three years, most of your payments would have gone on charges and you would be left with very little to show for your investment.
It used to be very difficult to find out what you were being charged but, since 1995, pension providers have been forced to disclose these and you should be able to see them in the key features document of your intended pension plan.
Remember that pension providers can still try and sell you “bad deals”. But now you should at least be able to distinguish between them.
Some pension providers would argue that good performance compensates for high charges, perhaps implying there is a link.
Sadly it isn’t that simple.
Owing to the uncertainty of any investment no one knows how your pension fund will do so it’s not as if you can pay more for a guaranteed better product.
What is certain is that your charges will have a direct effect on the eventual value of your pension fund. (See Personal Pensions vs Stakeholders for more on this).
Traditionally pensions were highly inflexible meaning once you’d signed up for one you couldn’t get out of any aspect of the agreement without paying heavy penalties.
For example, say you couldn’t pay one of your monthly contributions: Too bad.
Or say you were flush and wanted to pay more in to your fund. Well that would cost you.
But things have changed thanks to the Stakeholder pension, which is completely flexible. As a result most pension providers are now offering more flexibility on their personal pensions than ever before.
It’s vital to make sure if you choose a personal pension, rather than a Stakeholder, that it really is as flexible for your particular needs as you want it to be.
A reasonably flexible personal pension would allow you to do the following without penalty:
- Allow you to reduce your payments / contributions without penalty. For example, if you want to take a career break or become unemployed. Ask about “Waiver of Contributions Insurance”
- Allow you to have the option of retiring when you want without penalty
- Allow for internal switches / transfers i.e. changing between different funds within the same pension provider’s range of funds, without penalty.
- Allow for external switches / transfers i.e. changing your pension fund to another pension company altogether. If it’s not without penalty, how much will it cost? Will it be too expensive… Watch out for those pension schemes which say they’re flexible with switching but only allow you to switch your pension to another part of their company.
- Allow you to transfer to ANY Stakeholder pension without penalty (ie not only their own)