MONEY COMMENT
Don't Get Caught In The Pensions Trap

By Cliff D'Arcy
May 21, 2003

My close friends, Michael and Deborah, own and run a delightful café and restaurant in the heart of the city of Salisbury. Michael has been working as a chef for his entire adult life, first training at catering college before working with various chefs across the UK and abroad.

Being self-employed and having worked in many different establishments over the years means that Michael has never been able to benefit from a company pension scheme. However, he's a sensible and cautious chap, so he's been saving for retirement using a personal pension.

When Michael asked for my advice on his pension plan and mentioned that it was with Allied Dunbar (along with other investment and protection products that he'd been sold by an adviser "friend"), I was horrified. You see, Michael had unknowingly bought a desperately bad policy – thanks to incredibly high charges and inflexibility, it was one of the worst. To see what I mean, have a look at this protest site set up by Simon Kirby, a disgruntled Allied Dunbar customer: badpension.com!

I was reminded of Michael's dilemma (keep paying in or stop and switch?) when I received a press release yesterday from Chartwell Investment Management, a well-known independent financial adviser. Chartwell has revealed that, after the launch of Stakeholder pensions, many contributors to old-style pension plans believed that they would automatically benefit from reduced charges. Sadly, this is far from the truth: most insurance companies continue to charge the exorbitant fees payable under these existing contracts.

Chartwell quotes the example of a 38-year-old man with an Allied Dunbar pension (let's call him, picking a name purely at random, Michael), who has a fund worth £7,749. If Michael leaves his fund with Allied Dunbar until he reaches 60, the final value of his pension would be £38,700, if it grows at 5% a year.

However, if Michael transfers his pension, its value drops to £7,133, so he loses £616 by moving the pension. Nevertheless, he's better off switching to a new contract, since a Stakeholder plan with Scottish Equitable would produce a fund worth £45,300 at age 60 (again, with growth of 5% a year). That's a whopping £6,600 – or more than one-sixth - more for Michael, despite the transfer penalty, purely thanks to the new plan's lower charges!

So, if you took out a personal pension before Stakeholder plans were introduced, you may well be better off with a new-style contract. If you're interested, Chartwell will give you a free "pension transfer analysis" to see if you'd benefit from switching. If I were you, I'd give it serious thought – you might just spring free from the pensions trap before it's too late!

More: Visit our Pensions Centre | Read What Everyone Should Know About Pensions | Eat at the Gallery Café and Restaurant