Zombie pensions and other horror stories

Zombie pensions and other horror stories

If you go and buy a pension now the basic charges are likely to be 1.5% or less, with many occupational schemes offering at least one fund with a total cost of 0.75%, albeit without any active advice. Although this represents excellent value for “New Customers Only”, people with older schemes are not so well served.

The Telegraph, (http://www.telegraph.co.uk/pensions-retirement/financial-planning/sky-high-charges-were-on-course-to-destroy-my-savings/), showed the case of one transport worker, who had essentially static fund values for ten years or more as any growth was swallowed by the product and fund charges. For people with pension schemes bought in the 1980s or 1990s this is a considerable danger, as charges between 2% and 4%, before any active advice fees, were not uncommon.

Some pension funds, following provider amalgamations and inconsistent returns have very little equity exposure, so have minimal returns and fail to recover even their fund costs. This is most common with “closed” pension funds, (often known as “zombie” funds), who for reasons of volatility will be invested in cash and government bonds with low returns. It is not hard to imagine the position where some unfortunate saver has fund and product charges of 3% and an actual fund return of 0.5%, so their fund is actually going down 2.5% per annum, with inflation adding a further drain on their resources.

The key to getting best value from your pensions is balancing fees, returns, reviews and investment risk, as none of these are functioning in a vacuum. Higher levels of risk and higher returns should go hand in hand, but this is not inevitable; sometimes higher risk just means bigger losses. This is the point at which external advice can be very effective.

For a potential client, please review your existing pensions against this checklist:

  1. Do you have private pensions established in the ‘80s or ‘90s that have not been reviewed in the last 5 years?

  2. Are you aware of any fund guarantees, annuity guarantees or guaranteed tax free cash?

  3. Do you have any pensions where the annual statement shows no growth year on year or even a reduction in fund value?

  4. Do you have any pensions where you have not heard from the provider or trustees in the last 2-3 years?

  5. Are you expecting not to buy an annuity, but looking to use drawdown in retirement?

If you can answer yes to any or all of the questions, then you probably need a financial adviser, well in advance of your intended retirement date.

Our experience suggest that a single retirement strategy is probably a mistake, as if you have multiple schemes, you will also have multiple terms and conditions, multiple funds and even different Normal Retirement Ages. Trying to stuff a miss-assortment of pensions into a flexi-drawdown plan could lose you income and tax free cash guarantees, guaranteed pension indexation and even guaranteed spouse’s pensions, which could land you in hot water in this life and the next!

If you would like to know more about how we can help you plan and realise your financial goals, then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.