Pension Pitfalls to Avoid
By Lesley Campbell
The Financial Services Authority (FSA), has recommended a number of key changes to pensions this year and is consulting on others.
First on its list was a consultation on the mortality rates used by insurers in key features illustrations and these will change from December 31, onwards. The updated figures of likely longevity will give investors a more realistic estimate of what they can expect from a personal pension.
The FSA is also seeking to standardise the consumer price index used by investment companies in their illustrations. By making sure the same figure is used by all product providers, investors can more easily compare different products.
Estimating the future performance of a self-managed pension and aligning this forecast value with forecast spending requirements can be a complicated task. Here the FSA has issued proposals for the way companies selling investment products should illustrate the possible performance of their products - the so-called projection rates. These figures are the subject of much debate in the pension arena - setting them too high may give investors unrealistic expectations and the possibility of a shortfall; setting them too low means savers may be needlessly discouraged from taking any action at all.
At the moment, companies must use three different figures to illustrate the possible returns of a product and an even lower rate of the performance is looks likely to be weaker. But the FSA has discovered providers often fail to comply with the requirement to use reasonable illustrations.
Many product providers have taken issues with the FSA's recommendation to reduce the maximum figure that can be used to illustrate pension performance from seven per cent to five per cent. This figure is based on a fund invested two thirds in equities and one third in bonds. The new rate, many feel could mislead customers and interfere unnecessarily with the risk-return ratio - investors may feel the extra risk they take by investing in shares rather than cash will not be sufficiently rewarded by returns of just five per cent. ......
...... Alan Steel of Alan Steel Asset Management in Linlithgow has similar concerns about the transparency of SIPP fees. SIPPs are often the first port of call for investors wanting to manage their own pensions. "If you have a SIPP you need trustees, so once the money is inside the SIPP any commission disclosure only goes to the trustees, not the owner. They may have agreed two per cent cost as the funds go in, for example, but they are not told about further purchase of assets. The funds are held in cash then transferred into high commission products like offshore bond structure. Then inside the bond, they can buy unit trusts earning another 10 per cent instantly on another commission!"
SIPPs have a different structure from traditional pension plans where the provider is the trustee of the plan and has ownership of the assets. In a SIPP, the member can be in charge of making decisions and remains the owner of the assets with a co-trustee. ......
Quote courtesy of Business Insider Magazine