A happy retirement can be hit by the pension scheme pitfalls

Conal Gregory warns that retirement planning may not be plain sailing

Pension providers should hang their heads in shame. Policyholders pay premiums through their lifetimes to enjoy a happy retirement but so often the money is badly invested whilst providers’ expenses devalue the anticipated pension pot.

Pension fund values have fallen 45.3 per cent in 10 years and by an appalling 65.6 per cent over 15 years. Moneyfacts obtained these statistics from Lipper research, based on a male contributing a gross £100 monthly into a mixed investment fund and retiring at 65 years without a guarantee annuity.

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There are basically two forms of personal pension: with-profits and unit-linked. Policyholders with the former rely on annual bonuses to see that their funding is on the right track and likely to result in a large enough pot for retirement.

If no such bonus is applied because a minimum guarantee is in place and reliance instead placed on the whim of an actuary allowing a final bonus, no proper planning can be made.

Yet several firms adopt such an unhelpful approach. Aviva (formerly Norwich Union) is typical, applying no bonus year after year where a guarantee is in place but with a threat if the policyholder moves to another provider, “Please note that all or some of your benefits may be lost on transfer”.

Even with unitised policies, bonus rates are at the disappointing level of one to four per cent. Over 25 years, the performance from with-profits funds (based on £1,000 annual contributions) has varied from just £54,541 to almost double. The top performers are mutual providers:

n LV= (formerly Liverpool Victoria) £108,238;

n Wesleyan Assurance £87,828.

Unit-linked personal pensions with the same annual contribution over 20 years are now worth from £29,537 to over £41,000 with the top places taken by:

n Wesleyan Assurance £41,171;

n NFU Mutual £39,838.

Part of the problem with lacklustre funds is that such a small proportion is invested in emerging markets, like Brazil, China and India. Over 10 years, those paying in just £100 monthly may have a fund worth only £9,693 (Barclays Deposit Initial S2) or over four times this with £42,909 (Skandia BlackRock Latin America).

No wonder that a quarter of under 50s are yet to set up any kind of pension scheme, according to research by the website MyVoucherCodes. The many under-performing funds must be the reason why 68 per cent of people admit they are worried that they are not financially prepared for retirement, according to HSBC.

The average pension fund is only £30,000. Yet one in three women and one in five men will need to spend an average two years in a care home which can cost well over £50,000. “People have lost faith in pensions,” says Dr Ros Altmann, Saga’s Director-General, adding, “pension has become a negative word and it should be used only for money paid to you by the state. The rest is your own savings for your own future and should be called something else.”

Unlike ISAs and other possible retirement ideas, pensions provide the benefit of initial tax relief. This means that for each £100 contributed, only £80 needs to be paid. Higher rate taxpayers can secure a further 30 per cent tax relief. It is never too early to start and a pension plan can be opened for a new-born baby although access to a pension fund is not usually permitted until 55 years. Non-earners can pay in up to £3,600 annually.

Contributions can be made by the person who owns the pension, by an employer and by a third party (such as a grandparent).

If you are unable to join a company pension scheme, it’s vital to make your own provision. A growing number of people are using Self Invested Personal Pensions (known as SIPPs) as this allows a wider range of investment options even if charges are higher.

Seek a review of your current retirement funding from an independent adviser, who will also discuss your attitude to risk. One such guide is AWD Chase de Vere, which has a Leeds office.

Pearson Jones, another leading IFA, regularly reviews providers and currently tips Legal & General Cofunds Portfolio Plus Pension, Cofunds Pension Account and Skandia Investment Solutions. Their criteria is based on the number of external fund links, income drawdown functionality, no bid/offer spread, no initial charge, unlimited free fund switches, access to a fund supermarket and financial strength of provider.

Consistent under-performers over the last decade include Abbey HS Managed Pension B and Phoenix Managed pension series 7, according to James Jones-Tinsley at Pearson Jones.

“If you are earning a top end salary, there has never been a better time to get your pensions in order,” says Neil Messenger, head of financial planning at Grant Thornton in Leeds.

Although £50,000 per annum is the pension premium limit, subject to sufficient earnings, Ellis Bates says the opportunity to bring forward unused tax reliefs from the previous three years makes for a very flexible approach, allowing for the peaks and troughs of business and profit.

Barclays Wealth 2011 survey predicts that the number of millionaires in Yorkshire will grow by one-third by 2020. It says the region currently holds 44,000 millionaires – a 16 per cent increase in two years. Many will benefit by tax advice related to their pension.

Watch for restrictions that your provider may impose. Many force collective funds to be held rather than direct equities, even when investing in the UK market. Investec Wealth & Management (formerly Rensburg Sheppards) makes no such stipulation, even in small portfolios.

Anyone under 75 can open a SIPP, regardless of employment status. If you hold old private pensions, transferring them to a SIPP can give more control and the freedom to switch investments when you see an opportunity.

Before moving out of a mis-managed pension, check if any exit fees – known as ‘market value reduction’ or MVR – will be levied, as well as losing a valuable guaranteed annuity rate, guaranteed investment return or other benefit.

Prudential is paying £4m to 39,000 after mistakes in the value of their pension funds were uncovered.

Finally, when comparing costs, individual stakeholder pensions are capped at 1.5 per cent management fees, which includes initial/annual costs, policy fees and bid/offer spread.