Beware pension plans with costly guarantees
Experts claim commission is driving some firms to push unsuitable plans
By Teresa Hunter
The Sunday Times
Sunday 10 June 2012
Savers approaching retirement have been warned about flexible retirement plans with hefty fees that could leave them worse off in old age.
The popularity of variable annuities is soaring as workers shun the dismal rates offered by conventional plans. Sales rose 10% to £335m in the first quarter of this year compared with the final three months of 2011, industry figures show. Annual sales are expected to hit
£1.3 billion, against £1.09 billion last year.
Conventional annuities require savers to use their entire pension pot (after taking a lump sum) to purchase a contract providing an income for life. However, in the current market turmoil, the payouts are at record lows.
Annuity rates are linked to the yields on gilts (government bonds), which have been driven to record lows by demand from investors seeking a safe haven amid the Eurozone crisis. Yields have also been forced lower by the Bank of England's programme of quantitative easing, which was held last Thursday at £325 billion. ......
...... However, advisers have criticised the low level of the initial guarantees and the high fees for some variable plans. Commission to advisers, paid out of clients' pension pots may be as high as 6%. .....
..... Alan Steel, chairman of Steel (sic) Asset Management, said "People should not be misled by the guarantee. It is often set so low that there is no guarantee at all. Where there is more of a risk, you pay for it through higher charges, which will themselves dampen performance." ......
Some insurers have been accused of paying excessive commission to encourage consultants to push variable annuities to clients.
Advisers typically receive commission of about 1% from insurers such as Aviva and Legal & General for arranging a normal annuity. However variable annuities can earn them 0.5% a year as well as up to 6% upfront. Steel said: "In 40 years in the business, I have never seen levels of commission like these paid on annuities." ......
...... Experts have warned though, that savers could suffer a drop in income when their terms expire if annuity rates are lower than they are today.
Quote courtesy of The Sunday Times
Sunday 10 June 2012-06-11