The best pension providers of 2014
It's been quite a year for pensions following Chancellor George Osborne's shock Budget announcement that from April 2015 you will be able to do what you want with your pension fund – cash it in, take income drawdown or buy an annuity. The news, heralded by pension savers as the start of a revolution giving individuals the power to make their own decisions, simultaneously wiped millions of pounds off the value of the pensions industry overnight – particularly annuity providers.
Of course, for defined contribution pension savers, additional choice comes with additional responsibility and it's never been more important to think long and hard about the options available.
You need to work out what you want from your retirement lifestyle and get a realistic idea of how much it will cost; how much you will have to build up in advance; and when you come to retire how you will access the money to make sure it doesn't run out. In short, the level of retirement income you wish to live on is partly dependent on how well your pension scheme performs.
The Moneywise Pension Awards 2014 are here to help get you started by making informed decisions about your retirement. We have rounded up the best pension providers and funds currently available to give you an overview of some options that may be worth considering, depending on your personal circumstances.
Best stakeholder pension provider
Winner: Scottish Life
Highly commended: L&G
Stakeholder pensions were launched by the Labour government in April 2001, with low charges and no-frills minimum standards. They were designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable.
While the need for them has largely been replaced by the government's auto-enrolment scheme, which requires employers to set up workplace pensions for their workers, they still have a place for some savers. The Best Stakeholder Pension Provider this year is Scottish Life, winning the title for the second year in a row.
Awards judge Nick McBreen, an IFA with Worldwide Financial Planning based in Truro, said: "Scottish Life is the standout in this stakeholder category as it offers value for money, charging 0.9%. It has online functionality for pension growth projections and valuations but the key benefit to the investor comes from access to external funds. There is a choice of 48 funds and lifestyling and auto-rebalancing options are available if required, which adds further value to its offering."
Fellow judge Patrick Connolly, a chartered financial planner with Chase de Vere, adds: "Scottish Life has great strength within pensions, provides a reliable service, has a good range of investment funds and is supported by a secure parent company in Royal London."
Highly commended in the category was L&G. McBreen points out that while it may not be "as competitively priced as its rivals, with a maximum annual management charge of 1.5%", its plan "looks good in terms of online functionality and access to projections but lacks auto-rebalancing". But he adds: "It has a pretty good range of funds and the vital ingredient of external funds for the investment mix."
Best personal pension provider
Winner: Scottish Life
Highly commended: Standard Life
A personal pension is a sensible way to save for retirement for the self-employed, those who don't work, or anyone wanting to supplement their workplace scheme. Although you don't benefit from employer contributions, you get tax relief based on the level of income tax you pay. This means it costs a basic-rate taxpayer 80p to save £1, while higher-rate taxpayers pay just 60p and additional-rate taxpayers just 55p.
Your pension provider can claim basic-rate tax relief for you but to claim further tax relief, you will have to contact HM Revenue & Customs and may have to complete a tax return.
Scottish Life has done the double in 2014, also picking up the Best Stakeholder Pension award. Our third judge, Mark Stone, chartered financial planner at Bristol-based Whitechurch Financial Consultants, says of the winner: "I feel that Scottish Life has a complete offering with the plan of a cradle to grave arrangement with an investment offering for all investors."
Connolly adds: "Scottish Life has great strength in pensions, 120 externally managed fund links and the support of a secure parent company in Royal London."
Scott Gallacher, a chartered financial planner at Rowley Turton, is particularly impressed by its customer service and minimum monthly premium of just £100, compared to the likes of Aviva, which sets the minimum at £200.
He adds that because of this, for many people starting a pension, Scottish Life might be a practical option.
Of the runner-up, Standard Life, Connolly outlines the judges' opinion: "Standard Life is a stronger company than Scottish Life and Scottish Widows and with a larger and more impressive range of fund links. However, it is also more expensive. Whether you select it depends on whether you're willing to pay a bit more for extra choices."
McBreen adds: "The pension plan itself does not offer re-balancing but, strangely enough, does include a lifestyling option, which seems to be a bit of a contradiction."
Best Mainstream Annuity Provider
Highly commended: AVIVA
Annuities – insurance policies that effectively turn pension savings into a guaranteed income for life – are a contentious issue at the moment, with many insurance companies accused of deliberately offering poor-value annuities. In effect, they're being criticised for taking advantage of existing clients who fail to shop around for a better deal.
However, there is still a need for annuities, and a small core of companies have emerged as being able to stand out from the crowd and offer clients competitive solutions for guaranteed income.
Gallacher describes this year's winner of the Best Mainstream Annuity Provider category, Legal & General, as "one of the good guys still offering competitive annuity rates" and is particularly impressed by its customer service, demonstrated by the fact it has Financial Adviser Service Awards rating of five out of five".
Fellow judge Nick McBreen adds: "It's a mass-market product for anyone who is looking to convert their pension fund savings into an income for life, including those who are concerned about outliving their pension savings. The product offers income certainty for the risk averse from a leading financial services provider. It may be particularly suitable for people who don't have other sources of retirement income and can't afford to take the risk their annuity income could fall."
The runner-up this year is Aviva. Gallacher says: "Aviva has been firmly committed to the annuity market for some time now and in every case I have personally looked at over the past year it has been offered market-leading annuity rates. If you are in good health, then Aviva is likely to offer one of the best annuity rates for you."
Best Enhanced Annuity Provider
Highly Commended: Just Retirement
Enhanced annuities pay higher rates of income (sometimes thousands of pounds more) to those who are expected to have a lower life expectancy – you don't have to be seriously ill to get it. Smokers and regular drinkers can qualify, too.
Taking first place in the race to become this year's Best Enhanced Annuity Provider is a company that has "improved its customer service significantly in the past couple of years," according to Patrick Connolly.
His fellow judge Nick McBreen explained that its typical customer will usually be older than HMRC's minimum retirement age of 55 but occasionally younger people are eligible to retire early due to ill health.
He added: "The Partnership Pension Annuity is perfectly designed and priced for those people faced with health and lifestyle conditions that may lead to a reduced life expectancy and, in turn, enhanced annuity rates."
Highly commended in the category is Just Retirement, with Connolly a fan of its "outstanding service" and the fact that it is "always quick and helpful" and able to "offer very competitive rates".
Mark Stone agrees. "It is a good product with high- quality underwriting," he says.
Best performing funds within a pension
Mixed investment: 20-60% shares
Winner: Invesco Perpetual Distribution
Highly commended: Kames Ethical Cautious Managed
With thousands of funds to choose from when pension investing, it can be difficult to know where to start – and so it's unsurprising that many savers decide to stick with their provider's default fund. But if you're considering making a few selections of your own, our best performing pension funds are a good place to start.
The Mixed Investment 20 to 60% Shares sector was formerly known as ‘cautious managed' and today it's still home to lower-risk funds savers might like to dip a toe into from time to time. The individual funds can only invest a maximum of 60% in equities and at least 30% must be invested in fixed income, such as gilts (UK government bonds), at any one time.
Of this year's best performing fund in the sector, which incidentally was the same as last year's, Scott Gallacher says: "The Invesco Perpetual Distribution fund is one of my personal favourites. It aims for a balance between income and capital growth and sits between Invesco Perpetual's existing Income/High Income and Monthly Income Plus funds."
McBreen adds: "With Paul Read and Invesco at the helm of this fund, the five-year returns of more than 80% of the Mixed Investment 20 to 60% shares sector speaks volumes for the quality of this fund."(This compares with the cumulative performance of the sector of 44.3%, according to FE Trustnet.)
Its focus, he explains, is global debt securities, "as well as the influence of tactical use of derivatives". But the bottom line is the fact that it is a "top-quality consistent performing fund delivering both capital growth and income".
While Connolly points out that maintaining the performance of the fund following the departure of Invesco star manager Neil Woodford, who used to manage the shares portion of the fund, is a challenge, he adds that Chase De Vere is confident about its future.
The runner-up in the category was Kames Ethical Cautious Managed – "proof that having a social conscious doesn't have to cost you," says Gallacher. McBreen adds: "For those cynics who maintain that ethical funds don't make money, then they haven't met Audrey Ryan [the fund manager].
"A quiet considered approach to ‘ethical' stocks in the UK has produced a very healthy 89.9% return over five years, with only 46.7% being posted by the Mixed Investment 20 to 60% shares sector."
Mixed investment: 40-85% shares
Winner: Ecclesiastical Higher Income
Highly commended: Fidelity Moneybuilder Balanced Inc
Funds in this sector can take a bit more risk as they are able to have 25% more of their holdings in equities. This means it is more suited to investors who have the time to ride out peaks and troughs in the markets.
Gallacher outlines why Ecclesiastical Higher Income took the award for best performance this year. "It continues to deliver excellent returns, outperforming its sector average while not taking on any extra risk."
He adds that one of the fund's key strengths is its manager, Robin Hepworth, who is now in his 20th year at the helm, and, he says, is one of the UK's leading fund managers.
"Had you had the fortune or foresight to invest in the fund from launch in November 1994, you would now have 80% more money than had you just bought the ‘average' managed fund." McBreen says the fund is "a must-have in any well- constructed portfolio".
Highly commended in the category this year is last year's winner, Fidelity Moneybuilder Balanced Inc.
Gallacher says it "is one of my favourite managed funds", having "delivered excellent returns while being lower risk than the average fund within this sector and all with a very low annual management charge".
Best performing fund: flexible investment
Winner: Unicorn Mastertrust B Income
Highly commended: JPM Portfolio
This year's winner experienced growth of 115.7% in the five years to 30 June 2014, compared with the average Flexible Investment sector return of 60.9%. Funds in the sector can invest entirely in equities should the manager so choose. In this particular case, Unicorn Mastertrust B Income is a fund of Investment Trusts, so it doesn't invest in stocks and shares directly.
Gallacher explains: "On the one hand, this approach increases cost – due in effect to a doubling of the investment management fees – but it also increases diversification greatly. The use of investment trusts as opposed to unit trusts does increase the risk considerably, with the fund losing almost 50% during the banking crisis. However, if you are comfortable with this level of risk then the fund has delivered exceptional returns since then."
Highly commended was the JPM Portfolio fund, which invests in a range of underlying JPM equity funds, typically with around 50% in the UK and 50% in the rest of the world.
"Investors benefit from JPM's strength in different geographical regions and, as it's investing in its own funds, overall charges are cheaper than for many other fund-of-fund products," says Connolly.
Astute management of the fund mix by David Chan has produced growth of more than 93% in the past five years.
Best performing fund: specialist
Winner: AXA Framlington Biotech R ACC
Highly commended: AXA Framlington Health
The specialist sector is home to a collection of very different types of funds that can't be accommodated elsewhere – industries represented include everything from healthcare to agriculture. This year's winner is in the biotech business, meaning it makes technology to help improve people's lives and/or the health of the planet.
McBreen points out, while the Specialist sector has returned growth over five years of 53.6%, Axa Framlington Biotech "has delivered a whopping 185.8% over the five years to the end of June 2014". Gallacher adds that over the past three years alone, the fund has more than doubled investments.
However, McBreen warns: "Investing for growth in the biotechnology, genomics and medical research industries worldwide is an exciting but volatile business and fraught with potential highs and lows from a wide range of geopolitical influences. "For all specialist funds, I urge caution when allocating capital in a portfolio – but this Axa fund has to be worth a 5% slice investing in this dynamic and forward-thinking sector."
The runner-up in the category is another Axa Framlington fund – this time it's the health fund. McBreen says: "Gemma Game, who manages the fund, is enjoying a real purple patch for the fund and five-year figures of 134.2% tower above the average Specialist sector returns of 53.6% to 30 June 2014."
Gallacher adds: "For those loving an investment story, Axa Framlington Health's is pretty compelling. Barely a week goes by without the latest health scare. With a combination of an ageing world population and growing middle class in China and the likes, it's fairly certain that health spending worldwide is only going to increase."
Best Low-Cost Sipp Provider
Self-invested personal pensions, or Sipps, do what they say on the tin; you choose the investments but are responsible for managing your money. They used to be very expensive and offer access to all kinds of different investments, including commercial property.
But the costs have fallen greatly and are now around the same as a personal pension. Minimum contribution levels broadly in line with personal pensions, too, at £50 to £100 a month mean they're more popular than ever. Low-cost Sipps are offered by online ‘execution-only platforms', where you can buy and sell investments as you see fit.
In deciding upon a winner in this category, we assumed 7% annual growth before charges over 10 years, on initial portfolios of £50,000 (five funds with two deals a year) and £250,000 (15 funds, six deals a year). A shortlist was compiled based on value after 10 years and effective cost and the judges picked a winner. iWeb emerged victorious.
Nick McBreen says: "Trying to compare low-cost Sipps is incredibly difficult to do because of the very nature of the beast. Online platforms are very cost effective on the face of it, at least. There is little or no paperwork and less human intervention. However, the final total cost to the investor is driven by them to a great extent because the size of the Sipp investments and the frequency with which they trade will have an enormous impact.
"iWeb charges a mere £5 for fund and share trades with a quarterly administration charge of £22.50 for a portfolio worth up to £50,000. This rises to £45 a quarter above £50,000. These flat fees make it very competitive right now for most investors using it."
A feature of defined contribution pension funds. As people move closer to retirement, their tolerance to risk reduces. “Lifestyling” recognises this and provides an automatic switching facility from funds with higher volatility to ones with less volatility as retirement approaches. Generally this means the pension fund manager gradually moving a client from riskier assets such as shares into corporate bonds, gilts and cash as they near retirement.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.