Written by Karen Bryan
I was drawn into starting a personal pension for two reasons. I’m self employed, so it’s the only pension option open to me and I’d get 20% tax relief on my pension contributions (as I’m a basic rate taxpayer). Getting that 20% boost makes a personal pension sound like a no brainer. Annual charges on a stakeholder pension of between 1%-1.5% didn’t sound that bad, compared to a 20% top up into my pension pot.
However, as you can lose between 14-40% of the value of your personal pension over a 40 year period through the annual charges made by the pension provider. This is compounded by companies taking a profit of up to 20% when you buy an annuity. If you don’t buy an annuity but go for income drawdown, you’ll have to continue paying charges on your remaining invested pension pot.
Between annual charges and profits on annuities, personal pension holders are getting very little, or even no, benefit from tax relief, as it’s being swallowed up in charges and annuity profits.
It therefore appears to me that the UK Government is offering an indirect subsidy to the personal finance industry. A huge proportion of tax relief received by people paying into personal pensions is being channelled into income for personal pension providers.
As the personal pension set-up is incomprehensible to most people, you probably need to consult a financial adviser to decipher it for you. The cost of financial advice is going to further eat into any potential returns on your pension pot. However that advice could be very worthwhile if it means you find a pension provider with lower charges, above average annual returns and/or the highest annuity payout.
Surely a pension scheme should be simple enough for customers to understand without expert assistance? I wonder how the UK Government ever managed to come up with such a complex personal pensions system. I can only assume that there was a lot of input from experts, with vested interests, in the financial services industry.
Whose interest is being best served by the current personal pension set-up? In my opinion, the financial services industry is the winner here. The annual charges and profits on annuities eat up most, if not all, of the tax relief benefit for the pension holders, like me, who are basic rate taxpayers. I have to pay the annual charge, even if my pension pot drops in value. I am virtually forced into paying for financial advice, due to the bamboozling UK pensions landscape. Whereas, I am taking all the risks with my cash in exchange for an uncertain return.
I’ve suggested a no, or minimal, charges pension savings account wrapper for people who’d prefer to build up their pensions in a risk-free deposit account environment.