Moneywise Pension Awards 2009
Although the recession has made us more careful with our money, the threat of losing our jobs and the desire to build up a savings buffer means that some of us are neglecting our pension pots as a result.
The Scottish Widows UK Pension Report found that over a third of people aged over 55 with a pension believe the economic downturn has had an impact on their retirement savings, and according to Friends Provident, only 25% of us are saving enough in our pensions.
As well as saving less, after a year where market lows wiped out a considerable amount of value from many pensions, some savers are even taking the drastic step of stopping their pension contributions altogether.
Unfortunately, this type of short-term attitude towards our pensions will only get us into more trouble when we finally have to live off them in retirement. The UK has the fourth highest levels of poverty among over–65s in Europe, according to figures from the European Commission.
All this makes for gloomy reading, but despite this year’s turmoil you don’t need to panic. Given that the maximum state pension is only £95.25 a week in 2009/2010, no one wants to live off this alone, but as the state retirement age creeps up – it’s currently 60 for women and 65 for men, but will increase to 66 for both sexes by 2026 – we’ll be working longer, potentially giving us more time to put money away.
Moreover, in April 2010 the number of years of national insurance contributions needed to qualify for the state pension will also be cut from 44 years for men and 39 years for women to 30 years for both.
With companies increasingly closing their final salary schemes to new employees as well, the pension landscape is changing fast. This makes it even more crucial to choose the right pension.
Relying on one scheme to see you through your later years could be wishful thinking, so if you have a good few working years ahead of you, now might be a good opportunity to look at diversifying your approach.
Read on to find out which pensions Moneywise believes stand out from the crowd.
Best Stakeholder best stakeholder personal pension provider: Aviva
Pension: The AVIVA STAKEHOLDER PENSION
No. of funds within pension: 55
Restrictions: Customers can only invest in a maximum of 10 different funds at any one time
Charging structure: Management charge is currently 1%
Contact: 0800 068 6800
Commended: Legal & General
Introduced in 2001 as an alternative to personal pensions, stakeholder pensions were designed to be a simpler and cheaper option that would appeal to the majority of savers. Contributions can be as little as £20 and don’t have to be paid on a regular basis. As plans are reasonably simple, investors can take one out without first seeking the advice of a pension expert.
And because they’re so cheap, stakeholder pensions are suitable not only for the self-employed, but also for those who don’t work but are still in a position to put some money away each month – and even for those who have an existing company pension but would like to bolster their pension pot with a personal pension on the side. There’s no limit to how many schemes you pay into, and these contributions won’t affect your basic state pension entitlement.
However, the range of funds you can invest your pension pot in is limited, so those wanting a larger variety of funds to pick from should go for a personal pension instead.
This year’s winner, Aviva, has a choice of 55 funds to invest in, which is impressive when compared with some of the more limited lists of funds available from other stakeholder pensions.
“Aviva has shown it’s really committed to bringing simple low-cost pension products to the high street, making it possible for investors to take control of their retirement savings without having to worry about confusing choices,” says Tom McPhail, head of pensions research at Hargreaves Lansdown, who was one of the judges at this year’s awards.
Another judge, Ian Porter, proposition director at Alexander Forbes, also praised the “good investment options” and “excellent post-sales service” the scheme offers.
This year’s runner-up, Legal & General, offers up to 40 funds in its stakeholder pension and was praised by the judges for its impressive in-house investment divisions.
Best Personal pension provider (non-stakeholder): Scottish Widows
Provider: Scottish Widows
Pension: The Retirement Account
No. of funds within pension: 118 insured funds; 47 internal, 71 external, plus over 1,200 funds available via the funds supermarket
Restrictions: Minimum regular contributions of £200 per month and minimum single contributions of £10,000
Charging structure: Service charges vary between 0.1% and 0.7%. Investment charge depends on types of investment chosen
Contact: 0131 655 6000
A personal pension is probably a better option for those who want to invest in a pension with more fund choice than a stakeholder pension. With the markets taking a severe hit, many investors have seen their pension pots dwindle, and it’s up to the providers to show they are responding to the tough times with value for money, good customer service and a proactive approach to poorly performing funds.
With this in mind, last year’s winner Scottish Widows narrowly beat Skandia to first place.
McPhail praised its simple pricing structure, adding: “Scottish Widows has managed to reinvent its personal pension offering through the development of its retirement account, while at the same time maintaining high standards of service and broker support.”
Meanwhile, Philip Pearson, partner at P&P Invest and also part of the judging panel, was impressed with Scottish Widows’ wide fund choice. “The plan enables a balanced portfolio to be created across in-house and third-party fund managers with many of the most consistent and top-performing funds available,” he says.
Skandia’s higher charges kept it in second place, but for some investors it could be a worthy contender for the top spot. “If you intend to make significant contributions into your pension then this fund choice should more than compensate for the slightly higher charging structure offered by the plan, compared with the market average,” says Pearson.
Best performing funds within a pension
Pension providers offer a range of funds for your pension to invest in and usually include in-house funds alongside external options. Some pensions have hundreds of funds to choose from while others limit the amount of choice.
Managed funds invested across a range of assets tend to be more popular within a pension set-up because they present less risk than those in the specialist sectors, although those willing or able to dip into riskier areas could reap some impressive returns.
1. Top Cautious Managed fund: Henderson Multi-Managed Income & Growth
Manager: Bill McQuaker
Pensions offering this fund: Skandia, Abbey
%Performance: 1 YR 6.19%, 3 yrs 5.32%, 5yrs 34.15%
Contact: 0207 818 1818
Commended: Henderson Multi-Manager Distribution
The safest of the managed fund sectors, cautious managed funds can only invest up to 60% in equities, with at least 30% put into cash and fixed interest.
This year’s winning fund, Henderson Multi-Managed Income & Growth, is ideal for the long-term investor who needs a balance between risk and return. Just over a third of its portfolio is in UK equities.
Fund manager Bill McQuaker has been managing the fund for the past four years, over an extremely volatile period. Yet he has still managed to post impressive returns. Five-year returns for the fund stand at 18.3%.
“This compares favourably against other funds in the cautious managed sector,” says Nick McBreen, IFA at Worldwide Financial Planning. Pearson adds: “McQuaker is in the enviable position over the past 12 months of sitting on gains of almost 6%, against the market fall in this sector of over 5%.”
Henderson proves its dominance in this sector, with Henderson Multi-Manager Distribution fund taking second spot.
2. Top Balanced Managed fund: CF Miton Special Situations Portfolio
Manager: Martin Gray
Pensions offering this fund: AIG
% Performance: 1 YR 11.13%, 3 yrs 23.18%, 5yrs 79.59%
Contact: 0870 607 2555
Commended: Newton Balanced
This sector is also well-suited for pension savers because it invests in a spread of assets, with no more than 85% in equities and at least 10% in UK equities, making it less volatile.
The winning fund was created from the merger of Miton Optimal and IIMIA. Martin Gray has managed the fund for 18 years, steering it through good and bad times, and therefore he knows it very well.
“While delivering excellent returns, the clever point about this fund is that it takes a view on trying to reduce the volatility, rather than trying to consistently shoot the lights out by outperforming against its competitors,” says McBreen.
Newton’s Balanced Managed fund is our runner-up in this category and a popular fund choice with many of the main pension providers, because of the fair value it represents. “Surprisingly, the fund has managed to deliver ahead of the balanced managed sector and FTSE World index over five years with a return of just over 23%,” says McBreen.
3. Top Active Managed fund: Margetts Venture Strategy
Manager: Toby Ricketts
Pensions offering this fund: AXA
% Performance: 1 YR 1,65%, 3 yrs 14.85%, 5 yrs 77.8%
Contact: 0870 607 2555
Commended: Prudential Growth Trust
Active managed funds are seen as the riskiest of the managed funds as they are allowed to invest up to 100% in equities. But with the higher risk comes the potential for greater performance growth too.
Winning fund Margetts Venture Strategy, managed by Toby Ricketts, focuses on specialist areas, such as natural resources and healthcare, technology and, in particular, the Far East – two thirds of the winner’s portfolio is in Asia and emerging markets. This will undoubtedly lead to volatility in the short term but potentially promises impressive returns in the future. However, investors would be well advised not to put their whole pension into a fund this risky.
“The aim of the fund is to achieve long-term growth from international equities, primarily through collective funds,” says Pearson. “It should be used as part of a balanced portfolio.”
Runner-up in this category, Prudential Growth Trust, is praised for its consistent delivery over the last five years and is viewed by McBreen as an acceptable medium-to-long-term pension fund strategy. “The fund has managed to deliver very acceptable annualised returns over the last five years,” he says.
4. Top Specialist Managed fund: Threadneedle Latin American
Manager: Katy Dobson
Pensions offering this fund: Winterthur, Abbey and Skandia
% Performance: 1 YR -14.6%, 3 yrs 39.71%, 5 yrs 219.60%
Contact: 0800 068 3000
Commended: Invesco Perpetual Latin American
While it’s too risky to use for a large proportion of your pension pot, choosing some specialist funds could give it a boost. There is a large variety of funds covering vastly different areas, from commercial property to emerging markets.
This year is the year of Latin America, with Threadneedle Latin American fund the winner, and Invesco Perpetual Latin American the runner-up for the second year in a row.
Growth in the Latin American region should continue over the medium to long term; however, investors should be prepared for some scares en route as this remains one of the more volatile financial markets in the world.
Threadneedle Latin American has been managed by Katy Dobson since 2007 and, despite her short tenure, she has maintained the fund’s top performance within the sector.
Nevertheless, this and other specialist funds should only play a small part in a pension portfolio. “If you’re prepared to ride the rollercoaster, then you could achieve significant gains over the long term. But my advice is to bank the profit as it’s achieved, and wait for dips in the fund to provide buying opportunities for future gains,” says Pearson.
Invesco Perpetual Latin American fund casts its net slightly wider and includes the Carribbean region.
“The fund is strongly focused on financials, telecoms and consumer goods,” says McBreen, who expects significant returns over the next five years.
Best comprehensive SIPP provider: Hornbuckle Mitchell
Provider: Hornbuckle Mitchell Trustees
UK Shares, Unquoted
Deposit Accounts, Commercial property, Convertible securities, futures & options, Investment trusts, unit trusts/OEICs, insurance Cos Funds, Warrants, PIBs, TEPs
Charging structure: Initial max £345; Annual admin max £490; £30 per fund transaction up to £300 per year; property setup £600 per purchase.
Contact: 0845 345 2555
Commended: Standard Life
Self–invested personal pensions (SIPPs) give investors the chance to invest in a wide range of different funds and investments such as shares, gilts, commercial property, investment trusts, unit trusts. If you don’t think you will take advantage of the wider investment opportunities, or only have a limited amount of money, then it’s probably best to stick with a personal pension.
The flexibility of the SIPP approach will appeal to those who prefer more investment options and want to be in control. Their popularity is increasing following the government decision to allow consumers to opt out of the second state pension and place the additional funds (their protected rights funds) into a SIPP.
McPhail applauds winner Hornbuckle Mitchell for dealing with high volumes of bespoke SIPPs “without making a mess of it”, and Porter is impressed by the staff’s level of knowledge. “They have embraced SIPP flexibilities in a way that few others have, and deliver a flexible innovative approach,” he says.
Last year’s winner Standard Life was pushed into second place, but it retains a dominant position in the market thanks to its good online facilities and administration support.
Best low-cost SIPP provider: SIPPCentre
Investment Options: UK shares, gilts/bonds, deposit accounts, commerical property, convertible securities, futures & options, investment trusts, unit trusts/Oeics, insurance cos funds, warrants, PIBS, TEPS
Charging structure: Setup £120
Contact: 0845 839 9060
Commended: Killik & Co
Low-cost SIPPs still offer customers choice but the options are restricted in order to keep costs down. They are also generally run online, which reduces administration charges. This year’s winner, SIPPCentre, is an excellent example of this, having won the category for the fifth year running.
“SIPPCentre has very low dealing charges, a comprehensive range of fund choice and an easy-to-use website,” says McBreen. “It’s the online option for those clients who require a simple e-SIPP.”
Runner-up Killik’s charges are higher and its website isn’t as easy to navigate, but it’s still commended for the quality of its low-cost SIPP.
Best Annuity provider: Aviva
There are several different types of annuity on the market – but remember that you don’t have to buy your annuity from your pension provider.
Although buying annuities is almost exclusively to do with the rates offered, we also asked the judges to consider the providers’ customer service, administration and ease of set-up.
McBreen predicts a potential shake-up in the next few years. “The landscape is changing, with the rise in the profile of flexible annuity providers like Just Retirement, Partnership, Met Life, Lincoln and Living Time,” he says. “Competition for new business is fierce; in the future the high ground will be taken by providers that adapt to client needs but still provide good value.”
For now though, the big boys still prevail, with Aviva scooping the top prize. “It’s important to consider not only the terms available but also the financial strength underpinning the company’s offer. Aviva is particularly competitive, and has the financial strength to provide peace of mind,” says Pearson.
Canada Life, the runner-up, also consistently hovers around the top of the annuity tables, and is commended for its range of flexible options such as the Annuity Growth Account.
|Selection of Aviva quotes based on £100,000 annuity|
|Customer profile||Product||Annual income|
|Healthy 65-year-old man (non-smoking)||Level
|Healthy 65-year-old man (non-smoking)||Index-linked
|Healthy 65-year-old man (non-smoking)||Index-linked
|Healthy 65-year-old woman (non-smoking)||Level
|Healthy 65-year-old woman (non-smoking)||Index-linked
|Healthy 65-year-old woman (non-smoking)||Index-linked
|Source: Annuity Bureau|
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
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).
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.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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).
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.
Active managed funds
These funds try to produce returns superior to a “benchmark index” such as the FTSE 100 by a combination of picking the right stock at the right price at the right time. A fund manager calls the shots and tries to outperform the index. “Passive” or “index tracking” funds just try to match the index as closely as possible and are managed by computer.
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.