It is widely recognised that insurance company pension funds are pretty much guaranteed to underperform. Most are at best clumpy.
It is not unknown for some of these schemes to be valued at over Â£4bn. When a fund gets to that size you can expect it will change from an active investment to one that buys and holds.
An active investment is one that regularly moves your capital around, reducing risk and taking profits when certain stocks are performing well. When a fund reaches a size such as the above it is quite impossible for them to take an active approach with the capital.
Consider a fund for example that is spread between 100 stocks that has Â£4bn invested into it. On that basis the fund could easily have Â£40m invested in one stock. Can you imagine a fund manager trying to offload Â£40m in one afternoon if it was unhappy with it?
Because of this, managers take a buy and hold approach where they focus on the tried and tested stocks and keep them for long periods of time. Hence you will find that your performance graph is a long line which consistently follows and underperforms the Ftse100.
It is quite easy to transfer a pension fund but you should check the penalties closely before you take any such actions. Some pensions have large penalties on exit which should be analysed carefully. For example some pension providers apply a penalty charge which represents the charges they would be taking on the scheme if it were to run until maturity. Keen to avoid that, investors leave the scheme where it is.
But they need to consider that they would be paying these charges in any event. Whether you transfer out or keep the pension there, the charges will still be applied.
Also certain pension providers provide guarantees at maturity for the annuity (that’s the bit that turns your lump sum into an income). Annuity rates have fallen but some of the schemes have a guarantee written into the plan and can be c10% per year.
This is normally a block to transferring but you need to be very careful. Often this guarantee is offered on the proviso that you take your annuity as a single life and with no escalation in payment. This means that if you were to die that your spouse would receive no further benefits. Also if you were to live long the 'no escalation in payment' would mean that your pension would soon fall behind inflation.
Your independent financial adviser would check all of these aspects and more to see if it is worth transferring.
There are many options for you to consider in terms of where to transfer to which depend on a number of factors:
If charges are your biggest issue you might want to consider a stakeholder plan and access to cost effective trackers are widely available.
If choice of funds is most important as well as the potential for flexibility, a self invested personal pension plan (SIPP) may be the best option. This allows you access to a wide range of funds as well as a number of other options like commercial property.
Sipps were made more flexible and business owners who were bored with the high charges and poor performance of their plan have used the fund to buy their commercial property from themselves. This effectively introduces the pension value back into the company's bank account.
As they owned the property, the profit from the sale less any mortgages or tax etc will go to the company which is excellent for cashflow. As well as the above there are a wide range of other investments you can choose from including individual stocks and shares gilts etc.
If you would like further info on Sipps call Peter McGahan on 0845 230 9876, e-mail firstname.lastname@example.org
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.