In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, head of retirement policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at money@inews.co.uk.
Question: My husband is aged 69 and does not plan to retire until he is 75. He has had a ‘with-profits’ personal pension plan since 2004. The current plan value (excluding the final bonus) is £127,116, the final bonus (which they say they can’t guarantee) is £72,319 and the market value reduction is £5,657.
Last year, he paid £3,000 in personal pension contributions to the plan. Total charges and costs were 1.47 per cent. Both of us were horrified by the eye-watering charges, which all but wipe out any growth on his plan, before factoring in the effects of inflation.
We both invest with a different platform now – Self-invested personal pensions (Sipps) and Isas – and were wondering about transferring his with-profits pension to invest in a Sipp instead. However, the opaqueness of the merit of the with-profits plan makes it impossible to weigh up the risks – the default position (of course) being that my husband sticks with his existing provider.
Why are pension providers still allowed to operate these immoral schemes and impose such high charges and arbitrary transfer penalties?
Answer: If you have a with-profits pension, your contributions will be invested with those of other members into a collective pot.
With-profits pensions will usually offer to pay “annual” and “final” (sometimes called “terminal”) bonuses – the former each year, the latter at the end of your policy term. These bonuses will be a percentage of the value of your fund. The aim of this approach is to smooth out investment performance, so you are less directly exposed to rises and falls in the value of your investments over the shorter term.
A market value reduction or “MVR” is sometimes applied when a with-profits investor chooses to transfer their pot to a new provider before the end of their policy term. The purpose of an MVR is to ensure fairness across members.
For example, suppose there are three investors in a with-profits fund whose policies are worth £100,000, meaning the total value of the fund is £300,000.
If the fund dips in value by 10 per cent, for example because of a market shock, and one investor chooses to take their policy without an MVR being applied, only £170,000 would be left between the two remaining investors (i.e £85,000 each).
In these circumstances, the provider may apply a 10 per cent MVR on the transferring investor in order to ensure all members receive fair value (that is, £90,000 each).
In terms of costs and charges, it is crucial to keep these as low as possible, while also investing in a diversified range of assets and taking an approach that is in line with your risk appetite. It is normal for a percentage charge to be based on your total assets, although a figure of 1.47 per cent is relatively high by modern standards.
Unfortunately, your husband is not alone in feeling trapped in a product that isn’t delivering what was hoped for. Lots of people sold with-profits policies have seen their investments perform poorly, meaning large MVRs can be applied to those transferring out.
While I sympathise with your view this feels unfair, the key question is whether or not the policy clearly set out that an MVR could apply in these circumstances.
If you feel this was not properly explained to you – or not properly spelled out in the scheme documentation – you can complain to your pension provider. If this complaint is rejected, you can go to the Financial Ombudsman Service (FOS) for an independent adjudication.
You can find more information on how to make a complaint to the FOS here: How to complain.
In terms of whether or not to transfer, this equation will depend on the performance of your investments after charges with any new provider, taking into account the MVR, versus the performance of your investments at your current provider, where the MVR doesn’t apply. This will always be uncertain, but it’s worth speaking to a regulated financial adviser to fully assess your policy and the options available.