If you think that your retirement income is safe because you are contributing
to a pension, think again. New research shows that some funds used by
pension savers are performing abysmally. If your money is invested in one of
these “old banger” funds, your income at retirement could be a fraction of
what you expect.
A report by Hargreaves Lansdown, the independent financial adviser (IFA),
examines these old bangers in two of the biggest sectors: UK equity and
managed funds. The report names and shames 45 funds that are run by some of
the biggest insurers. Pension savers have about £55 billion invested in
these dud funds.
Contributing to a pension is one of the most tax-efficient ways to save for
retirement. The Government adds £22 for each £78 that you contribute. If you
are in a occupational scheme, your employer will often contribute as well.
But these perks can be eroded if your money is in a dreadful fund. The funds
highlighted by Hargreaves Lansdown are a mix of retail funds and company
schemes, sold mostly by IFAs more than ten years ago.
One reason why some funds have underperformed is that they are no longer
looking to attract new money.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says: “These
funds may have been the top models in their day, but the investment choice
available has widened and better vehicles for pension savings may now be
available.”
UK equity and managed funds from Abbey, AXA, Barclays, Clerical Medical,
Friends Provident, Norwich Union, Prudential, Scottish Equitable and
Scottish Life are among the worst performers.
Investors with money in one of the worst-performing UK equity funds will have
garnered returns of only two thirds of the growth achieved by the FTSE
all-share index over ten years. These funds returned an average of 5.8 per
cent a year over ten years, well short of the 7.7 per cent achieved by Legal &
General’s UK Index Tracker, which is an average UK equities tracker fund.
Mr McPhail says: “Getting 7 per cent growth on your pension, rather than 5 per
cent, will mean that you can retire five years earlier on the same income.”
A pension that has 7 per cent growth will buy an annual income on retirement
of £9,722 after investing £300 a month, including tax relief, for 20 years.
Invest in a fund with 5 per cent growth and you will receive £2,000 less
each year. A saver who paid £300 a month into L&G’s UK Index
Tracker would have a retirement pot of £56,116. However, those unfortunate
enough to have invested in an average UK equity old banger would have only
£51,334. If the £300 was invested in Invesco Perpetual’s Income Fund, run by
Neil Woodford, the retirement pot would have grown to a stunning £85,758.
Kevin Wesbroom, pensions consultant at Hewitt, the actuarial firm, says that
some old banger funds were sold by IFAs who have failed to monitor the
performance. “If the IFA is not getting annual trail commission on the fund,
he or she probably has no real interest in making sure the funds continue to
perform. The interests of the adviser tend not to be aligned with the
interests of the client. It is, therefore, up to investors to keep track of
performance.”
The £8 billion Scottish Equitable Mixed underperformed the average of the
balanced managed funds run by members of the Association of British Insurers
by more than 20 per cent. Canada Life’s UK Equity PS4, meanwhile, was
singled out as one of the worst performers. The fund, valued at about £350
million, has risen by only 5.3 per cent more than inflation since April
1997, barely increasing the value of the money paid into it over ten years.
Mr McPhail says: “We can only attribute this performance to an unwavering
dedication to making the wrong investment decisions at pretty much every
turn.”
But investors who find that they are trapped in an old banger are in a sticky
situation as they may have to pay hefty penalties to move their money
elsewhere. Typical transfer penalties are between 5 per cent and 15 per cent
of a policy’s value, but they can be as much as 40 per cent.
Advisers say that most investors can sidestep these charges by switching to a
better-performing fund from their existing provider. Alternatively, they can
take the hit in favour of better returns over the long term. Justin Modray,
of Bestinvest, another IFA, says: “While transfer charges can be a
disincentive, it can still be worthwhile moving if you feel that stronger
performance will more than compensate by the time you retire.”
However, some old banger funds may offer attractive annuity rates. Mr McPhail
says: “Before transferring to a different pension, check whether you are
entitled to a guaranteed annuity rate, which can give you a signif-cantly
higher income at retirement.”
To check Hargreaves Lansdown’s list of old bangers, visit www.h-l.co.uk.
Action plan
Ask your insurer or company scheme administrator what the fund performance has
been over one, three, five or ten years and compare it with Hargreaves
Lansdown’s list of “old bangers”.
If your company pension is an “old banger”, ask for a list of alternatives. If
there is a better fund available, ask to switch. Some schemes allow you to
transfer out the money you have accumulated and will still pay in employer’s
contributions, but ask first. The last resort is to leave your company
scheme.
If you have a personal pension, check your insurer’s website to see if better
funds are available or ask an IFA for ideas. For complete control, move to a
self-invested personal pension (Sipp).
Remember that penalties may apply when you switch and you could lose benefits
such as guaranteed annuity rates.
CASE STUDY
MAUREEN SCOTT started to manage her own Standard Life pension six months ago
and has improved its previously “awful” performance by choosing her own
funds through a self-invested personal pension (Sipp) with Standard Life.
Now Ms Scott, a 45-year-old project manager for a software company, is
receiving 20 per cent growth on her investment.
After consulting online tools offered by Hargreaves Lansdown and Standard
Life, Ms Scott chose to transfer her money into seven funds, including
Invesco Perpetual Income and Aberdeen Emerging Markets.
Ms Scott says: “As soon as I started managing my own money it made a huge
difference.
“The online tools map the performance of funds on a chart, including five and
three-year performance, and assess the risk profile. I plan to retire at 65,
so I feel that I can take more risk now because I have 20 years to grow my
investment.
“The moral of the story is that it pays to manage your fund and monitor your
pension.”
