FOOL'S EYE VIEW
Are Pensions A Good Idea?

By Rob Davies
February 6, 2001

Colchester, Essex -- As I get older, pensions are becoming more and more important to me, and I find that they take up an increasing amount of time. Unfortunately, the more I learn about them the more irritable I get. It is not that pensions are fundamentally bad. Far from it: they are basically good things. It is just that when an institution gets its hands on your money, two things happen. First of all, it does all it can to keep the money, and secondly, it becomes very coy about telling you what it is doing with it, how much it is charging and how well it is doing.

I have six pensions so I reckon I am as well placed as anyone to comment on their virtues or faults. These six pretty much cover every option available to the market. And I have to say I am not happy with any of them. These are the reasons why.

Company schemes

I have a deferred defined benefit scheme from a former employer that promises to pay me a percentage of the salary I was being paid when I left that firm seven years ago. The problem is that the pension is only growing in line with the retail price index, currently around 2%/yr. If inflation takes off the increase is limited to a maximum of 5%/yr. Even with my limited investing skills I reckon I can do better than that. So I asked for a valuation with a view to transferring it to a SIPP (self-invested personal pension). However, the valuation was so ludicrously low I would be mad to take it. The transfer valuation assumes the firm will make a 9% a year return on equities and 8% on government bonds. While the equity returns look optimistic the bond number looks downright fanciful; yields today are down to 5%. When I asked for further details on the transfer calculations I was told it was not possible to send a copy of  "the calculation of your transfer value due to its complexity". Is that arrogant or what?

So my choice is to take a hit on the transfer and hope I can beat 9% a year every year for 13 years, or to sit tight and watch the value of the fund fall in real terms. Even if I make 9%, net, that only gives me a pension equal to what I have now. I will be no better off. There is a GMB element (guaranteed minimum benefit) from contracted out SERPS in this scheme too, but that is not transferable.

My other company scheme is a defined contribution. I have no idea what I put into it, net or gross, and what its real return has been. But it is probably the best scheme of the lot.

Personal Pensions

I've got four of these, all with the same company. One is the contracted out SERPS, like the GMB, and it cannot be moved so let's ignore that. There are two pension plans and one FSAVC. I only discovered recently that it is not possible to take a cash lump sum from the FSAVC on retirement, but otherwise they are basically similar. Over the last 13 years I have contributed £x into these schemes (where x is such a large figure that I am too embarrassed to reveal it). Now, the last 13 year period has been the biggest bull market this country, and the world, has ever seen and the FTSE has tripled. So investments should have done well, shouldn't they? Sure, all the money didn't go in at once at the beginning, but even so I reckon a 56% gain on the money invested is not very clever. That figure is the value today and is net of all charge and, try as I might, I cannot actually find out how much I have paid in charges, or indeed am paying annually now.

So, like my other pension, I am trying to move these three pensions to a SIPP where costs will be lower. Ah now, transfer values. In this case the company concerned came back and said it would knock 11.9% off the fund if I transferred it out. Ouch, that is a large number. Why, I asked, was it so big? Apparently, it is because the company expects to get income from my money over the life of the pension, and they didn't charge enough in the early years.

I find this an interesting concept. Initially, and each year, the company charged me for administering my pension. But if I want to remove it they will still charge me for what they expected to get in the future. That concept staggers me: I cannot think of any other type of business that uses its estimation of future profits as a basis for charging.

So, Fools, what should I do?

• Switch everything into a SIPP, take the hits and make up the difference through superb trading?
• Keep the defined benefit pension but switch just the personal pension to a SIPP?
• Keep both as they are and have a quiet and stress-free life, but probably end up poorer?

One thing is for sure. Knowing what I do now there is no way that I would do the same again. If I could go back in time I couldn't do much about the company scheme, but I certainly wouldn't buy a personal pension, with all the regulations and charges. A low-cost SIPP, maximum use of ISA allowances and just buying plain vanilla equities would be the way to go. After all, how many people have used their £7,200 capital gains tax allowance?  

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