Property Investment Blog – 80% Charges on Pension Contributions??
It's what I have been saying for ages. It's right on the cover of my book and explained in detail in the first chapter. Now it's been the subject of a BBC Panorama investigation. Individuals in the UK could be paying as much as £96,000 in charges on pension contributions of £120,000. That's a whopping 80% fees.
The allegation was part of a damning look at personal pensions in the UK, which covered pension charges, mis-selling, commissions and churning, and other issues.
Using case studies to illustrate its arguments, ranging from people who had seen an annual return of just 3% after more than 20 years, to someone who had been charged a 10% commission for advice on moving their pension pot – built up over many years -from one provider to another.
It's sickening and deplorable.
Panorama produced a couple of experts to talk about the effects of a 1.5% annual charge which from my experience is commonplace. One said that this would decrease the overall pot by 38% over time. Naturally though, this figure was disputed by the Association of British Insurers, which believed that average charges would be lower than this. Another claim was that over £1bn was held in under performing funds, (which is certainly my experience) and high turnovers of funds reduced returns as fund managers traded heavily. Of course with each trade, new commission were taken.
Watching all this charges on pension contributions absolutely boiled my blood.
The “charges on pension contributions crisis” in the UK comes down to three major problems which no-one seems to be addressing simply because it's perceived as too big an issue. But I believe it's just too important an issue to deny any longer and of course, the longer we leave it the worse the problem becomes.
The biggest problems everyone talks about are high charges and poor performance.
High charges because commissions are taken upfront before you make a return, limiting the effects of compounding. So the government looks to reduce charges by making to more transparent and regulated. This only serves to drive prices up so it has the opposite effect of what they want. The charges change names and for a while everyone thinks a solution has been reached. It just isn't true.
Poor performance is another huge issue. Because traditionally, performance across the board is average at best, the industry needs to come up with much better way of tracking best practice.
In building an investment property portfolio I have created a whole systematic approach with rules, laws, principles, cash flows etc. This systematic approach means results are almost mathematical. But in “pension-land” they use words like diversify, exposure, and liquidity. Sometimes I wonder if they really understand them deeply or even if they use them themselves.
Additionally, far too often today's performers are tomorrow's dogs which means you have to change from one fund to another and therefore pay extra commissions which obviously leaves less for you in retirement.
The problem that rarely raises its head is the problem of contributions and this is REAL the ticking time bomb.
Right now the average UK employee does little or nothing towards their retirement contributions, they simply ignore it and hope it will be OK It won't. This simply isn't good enough. We all need to put more aside for retirement and get an investment eduation to make it perfrom at its best.
In Australia, each employee pays 9% charges of pension contributions of their wage into a pension fund plus employers top it up by 9% as well. So theirs is 18% going in pre-tax so that helps even more. The Aussies are in a great position for retirement with 18% being put aside each month. Or are they?
In fact, even with 18% they are still concerned this is not enough so they are increasing it up to 12% and 12% or 24% of a person's wage will be put into their pension, free from tax. Maybe this will be enough to set the Aussies for a well funded retirement.
The UK government has totally missed this point. Their answer is to make a compulsory payment to your pension fund, that is unless you opt out. So of course most will opt out and it will fail. Someone in government needs to man up, but both parties are too scared to make the decisions that need to be made.
In the meantime, real people -your parents, your friends, perhaps even you will struggle to live more than a meager existence in retirement.
Of course, there is something you can do about it. Call the team on +44 (0)207 923 6100 and get sorted now, today. You cannot afford to wait.
Live with passion,
Brett Alegre-Wood
