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Personal pensions: time for a midlife move?

Modern pensions – those taken out within the last 15 to 20 years – are much simpler and more flexible

February 29, 2012 | By:

Almost a quarter of what you pay into a personal pension could be eaten in charges. Switching providers may be easier than you think, says Sheila Prophet

PERSONAL PENSIONS-MIDLIFE MOVE Wooden-chess-pieces-620 Bigstock 36360949Have you checked the charges on your pension lately? More than a third of British people of working age – that’s 11 million out of 35 million – have personal pensions, but many of them are still offering shockingly bad deals.

According to a recent report by Money Management, people investing regular amounts into their pensions could lose almost a quarter of it (23 per cent) in charges over 25 years.

As an example, the report looked at the high-charging Series 6 pension with Skandia Life. If you paid in £200 a month and received seven per cent interest, the final fund would amount to £157,494. But over £37,000 would be eaten away in charges, leaving you with just £120,000 of it.

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An average scheme would take around £23,000 in charges, leaving the saver with £134,000.

With figures like these, it is clearly a good idea for people midway through a pension term to do a review, and consider bidding their scheme adieu.

“In the past, old-style pensions were often difficult to get out of, with high penalties for doing so,” says Billy Burrows of the Better Retirement Group. “People put switching pensions into the hard-to-do box.

“But modern pensions – those taken out within the last 15 to 20 years – are much simpler and more flexible. It is now far easier for people to consider switching, just as they have become used to switching their gas or electricity supplier.”

Unsuitable advice

There are differences, of course. Switching to the wrong pension in your fifties could have drastic long-term consequences, leaving you thousands of pounds poorer when you reach retirement age. And worryingly, a Financial Services Authority investigation in 2010 into the 4,500 companies involved in pension switching found that two-thirds were offering unsuitable advice.

So if you are taking a closer look at your retirement savings, it is vital to find an independent advisor specialising in this area. You can search for advisors in your area at Unbiasedand find out what his or her qualifications mean at the Which? page on Choosing a financial adviser.

Ask your current provider for a transfer value analysis, which will tell you how fast an alternative pension will have to grow to match the benefits already offered, and find out if you will have to pay exit fees or lose bonuses or benefits if you make the break.

How to compare

If you are looking for lower costs, you might consider a stakeholder pension, which has charges capped at 1.5 per cent for the first ten years and one per cent afterwards. It allows flexible payments and has no exit charges, should decide to move again.

You can find useful tables allowing you to compare the best-value pensions and see if they suit your personal circumstances at Money Advice Service.

Confident investors might also look at a DIY SIPP (self-invested personal pension), which allows you to choose your own investments while still benefiting from the same tax relief (up to 50 per cent) as other types of pension.

SIPPs used to be more suited to people with larger funds, but low-cost SIPPs are now available from a number of providers, including Sippdeal and Hargreaves Lansdown.

With these SIPP ‘lites’, there are generally no set-up or annual administration fees; you simply pay for online trading. Some allow you to pay in as little as £50 and there are no fees for transferring, which makes this an attractive option if you have changed jobs over the years and acquired a number of pensions that you would like to consolidate into one pot.

Those who have moved around in their careers might well have left pensions behind, too, so this is a good time to track them down using the Pension Tracing Service, which will conduct a free search through a database of over 200,000 pension schemes. The details are on the Directgov Pensions and retirement planning page.

This site also has much more information on the subject of pensions and retirement planning, as does the indispensable Pensions Advisory Service.