I’ve spent the last week reviewing my pension arrangements, and it has turned into a bit of a minefield. It seems that while my pension hasn’t been performing as well as some others, I have managed to build up quite a nice pot. It seems that to retire on a half-decent pension, you need to amass somewhere between 3/4 million and 1 million in your pension pot. While this sounds pretty ridiculous, I have found that if I increase my contributions slightly and maybe move to a better performing pension provider, that kind of figure is possible assuming the FSA approved growth rates.
But the problem I am facing is that IFA’s are only too willing to suggest other pension providers because they get huge kickbacks in commission. For instance, one IFA recommended Scottish Equitable, but in the small print it said that they would pay him an immediate lump sum of over £7,600, followed by yearly payments of 0.5% of my fund value! Of course this money comes out of my pension pot and is a ridiculous amount of money just for getting my signature on a dotted line. Also it seems that most of the Scottish Equitable funds have been performing even worse than my existing pension provider (according to trustnet). On top of the fees the IFA makes, there’s also the annual management fees that the pension providers charge, with is normally somewhere between 1.25-1.5%. Stakeholder pensions may only charge 1% but you soon find that you are very limited in the range of funds you can invest in with such low fees.
The thing I don’t like is the fact that all these people have got their fingers into my pension fund and are syphoning up to 2% a year out of it. When you look at the projections, you can see that these charges add up to a substantial amount over the years – one illustration I have shows the fees could add up to over £100,000 over the course of the policy.
So I am starting to think I am in the wrong business – if they are making so much money maybe I ought to start my own pensions company? 🙂
At the moment, I am looking at a SIPP (self-invested personal pension) or simply using my annual ISA allowance. Again there are annual fees to take into account, but at least I won’t have an IFA dipping into my fund. The ISA route is interesting, because although you don’t get tax relief on your contributions, you also don’t get taxed at the end when you take the money out, whereas with a pension it’s the other way around. Also with an ISA, you are free to take the money whenever you want, whereas with a pension it is tied up, and even when you retire you can only take 25% as a tax free lump sum (with an ISA, you can take the whole lot).
Obviously, the biggest limitation with an ISA, is that you can only put in £7000 a year, so it may be worth keeping my existing pension going, but pay the increased contributions into an ISA. In fact, the more I think about this the more sense it makes – I think I may end up going down this route.