Click here to go back to the SERPS Main pageMrs BM had a Personal Pension Plan that had been set up to receive contracted out rebates. The contract commenced in May 1991, with a retirement date of 2013, at age 60. The current fund value is £10,200, which has been invested in a Managed fund since the plan started. The fund value is only slightly more than the total of the rebates paid in.
The charges applied to the fund and each new rebate where unreasonably high. As a result each rebate lost money in the first year of investment, even if a 7% return was achieved. After her review the charges have been reduced by an amazing 86.43% resulting in a rebate value 14.51% greater in value than the old contract based on a 7% return after the first year. The rebates now have a chance of growing even in times of low equity returns. The existing fund is now invested in a far more appropriate fund that should meet with her expectations.
The fund is regularly reviewed and amended when appropriate. Mrs. BM also received advice in respect of contracting in or out. When it is time to take the benefits she will be advised of the most appropriate option.It is not too late to have your plan reviewed, but it will be too late when you need the benefits.
How Can This Be Possible?
The fund has been invested in a Managed fund since the plan started. The contract allows one free fund switch per year, after that it is £15 per switch, bearing in mind that a switch is one transaction, therefore to come out of one fund and to move into another is actually 2 switches, therefore one fund rearrangement during a 12 month period will cost a minimum of £15. There would also be a small initial charge applied when buying into the new fund.
If the fund is regularly monitored, which was not the case, it is likely that the fund will be adjusted at least once in any 12-month period. If the fund performs at the standard projected return of 7% per annum and a rebate of £1,000 is paid by the DWP, the effect of the charges on the £1,000, and the growth made will reduce the rebate by 7.37%. Even if 7% growth is obtained the following year, due to the charges the fund drops in value by a further 1.14%. If no fund switch were made the gain would only be 2.10%, probably less than the retail price index. In times where no investment return is made the fund value would be reduced even further.
The only reason growth is likely to be made is because the future rebates dilute the fixed cost of a monthly policy fee or the level of growth is greater than the 7% used for most projections. Most experts are of the opinion that an average of 7% net growth may not be achievable without an unacceptable degree of investment risk.
As a result of switching the plan from one contract to another the overall benefit to the next rebate is an additional £133.73 at the end of the first year, or as a percentage a 14.51% greater value than the old contract.
This is a very important rearrangement, as, with the old contract each rebate will have to recover the initial costs before any growth is obtained. In times of low equity returns or falling equity values the rebate will be unlikely to provide sufficient income to equal the Government guaranteed benefits, let alone better them. The new contract provides an immediate benefit to future rebates and the existing fund.
Furthermore, in order to adjust the fund in line with market trends or a change in your circumstances, however many switches are required, they can be made at no cost. The long-term effect of reducing the charges applied to your personal pension plan, when compounded will make a massive difference to the end result.
This is why it pays to have a SERPS REVIEW. It is not too late to have your plan reviewed, but it will be too late when you need the benefits.
*The mathematical calculations do not take into account the effect of compounding on a reducing or increasing fund but are averages. The intention is to demonstrate the adverse effect of high charges.