The annuity issue is actually only one problem for pension savers. In fact, there are several issues with which savers and their advisers should be concerned. Steve Webb, the pensions minister, is currently instigating a review on pension charges, looking at older pension contracts with annual management charges that can be as high as 2.3%. In addition to this, where charges are not transparent, the additional issue of poor annual bonus rates payable on With Profits plans.
A headline in the Money Mail on February 26th referred to ‘With-Profits plan pay-outs plunging’. This highlighted the fact that, despite returns of over 9%, some with-profits endowment pay-outs were down by between 3.5% and 7.5% on the previous year.
Recent newspaper articles have highlighted falling With Profits bonus rates, notwithstanding the growth in the underlying funds. The asset mix of these funds means that, going forward, the upside potential is limited. You will be only too well aware that low interest rates mean paltry returns on your cash savings. Well, With Profits funds suffer from the same problem because, under regulatory requirements, they are obliged to hold a large proportion of low risk assets such as fixed interest securities.
Moreover, you cannot alter the asset mix to suit changing requirements. With many companies paying good terminal bonuses at the present time, it may be worth considering transferring to a more flexible arrangement and bank the bonuses before they are reduced or withdrawn during the next stock-market reverse.
A recent analysis of a client’s pensions revealed that the average annual bonus rate payable by Prudential (incorporating Scottish Amicable) over the past few years is 2%, despite the fund growing by 33%. I don’t need an education about the application of bonus rates. I understand that the company cannot distribute the full increase in the fund as an annual bonus because, once added, it is guaranteed. It is the terminal bonus which reflects the growth of the fund over the term of the policy but this could be nil depending on the timing of one’s retirement.