Moneywise reveals its top pension picks
Pensions are rarely out of the spotlight these days. The new coalition government has already introduced proposals (effective from April 2011) to abolish the need to buy an annuity by the age of 75 and to reduce the annual pension allowance from £255,000 to between £30,000 and £45,000.
It's likely that the state pension age will rise to 66 within the next five years, while the whole of the public sector pension system is under review.
It's an unsettling time for anyone trying to plan for their retirement – but the threat of change is no excuse for sitting back and doing nothing.
Indeed, the likelihood of a progressively later state pension age makes it all the more important for individuals to take responsibility for saving regularly into their own plans.
However, surveys show that most of us are not feeling at all financially prepared for retirement. The first UK Unretirement Index published by Sun Life Financial of Canada finds "widespread concern amongst consumers over how much needs to be saved for retirement, where this will come from, and what sort of lifestyle can be expected once retirement has been realised".
Saving regularly into a pension scheme is the single most important step to take – and the earlier the better. You may have access to a company scheme where your employer also makes a contribution to the pot. If so, it's generally worth joining.
But if you don't have that option, or you want to supplement your company plan with a personal pension providing a wider choice of investments, now's the time to work out what you need and set up a pension savings scheme.
So where do you start? Most of the big insurance companies offer pension plans, and you might well assume that one would be pretty much like another – but you'd be wrong.
Providers can vary not only in the range of pension plans and underlying investments they offer and the charges they levy, but in their levels of customer service and the quality of their administration. At the most basic level, some are just much more innovative and forward-thinking than others.
The annual Moneywise Pension Awards sets out to identify the pension providers that serve their customers best – and some of the top-performing funds that could work particularly well for pension investors according to their particular levels of risk.
BEST STAKEHOLDER PENSION PROVIDER: SCOTTISH WIDOWS
Provider: SCOTTISH WIDOWS
Pension: SCOTTISH WIDOWS STAKEHOLDER PENSION
No. of funds within pension: 35
Restrictions: Can invest in maximum of 10 funds at a time
Charging structure: 1%
Contact: 0845 767 8910
Commended: FRIENDS PROVIDENT
Stakeholder pensions are simple, flexible and low-cost. They were launched in 2001 to encourage those people who struggle to put money aside to save for retirement, and the qualifying rules reflect that aim.
For example, stakeholder plans must accept contributions from as little as £20 and you can pay into them on a weekly, monthly or irregular basis, with no penalty fees. They must also charge no more than 1.5% of your pension fund each year (falling to 1% after the first 10 years).
As a result, fund choices may be more limited than more comprehensive plans. However, if you don't want to call on expensive advice or be too involved in managing your plan, this may not be a bad thing.
The judges make the point that, because stakeholder pensions have to operate within these strict guidelines, it can be difficult to differentiate between their offerings.
But Scottish Widows, which scoops the top prize this year, is praised by the judges for its all-round qualities, including its range of 35 funds, incorporating a selection of external investments managed by State Street Global Advisors.
"Scottish Widows deserves top position for providing a very comprehensive package for a stakeholder pension, with good online facilities, a wide fund choice including the option of third-party funds, and a low charging structure," says Philip Pearson, partner of P&P Invest.
Tom McPhail, head of pensions research at Hargreaves Lansdown, adds: "Scottish Widows has made decent efforts to do more than simply offer a lowest common denominator pension. It offers a reasonable menu of funds, competitive pricing and decent online facilities."
Runner-up Friends Provident, meanwhile, is described by Nick McBreen, an adviser with Worldwide Financial Planning, as "a simple and fair value stakeholder contract". He particularly likes its fund range, which includes 32 external funds, and its lifestyling options.
BEST PERSONAL PENSION PROVIDER (NON-STAKEHOLDER): STANDARD LIFE
Provider: STANDARD LIFE
Pension: STANDARD LIFE ACTIVE MONEY
No. of funds within pension: 161
Restrictions: Minimum monthly contribution £150, minimum yearly contribution £1,500
Charging structure: 0.5% plus underlying fund charges
Contact: 0845 278 5631
Commended: SCOTTISH WIDOWS
If you're looking for access to a comprehensive range of funds from various different managers, personal pensions are likely to be a more appropriate choice for you – although they may have higher charges and may also require higher monthly contributions than stakeholder plans.
The judges therefore looked for an optimal combination: a cost-efficient charging structure; broad fund choice; full online facilities; and good customer service.
Standard Life, the 2010 winner by a slim margin, launched a new personal pension product called Active Money earlier this year, which is well liked by the judges.
Designed with savings-shy 'Generation Y' investors in mind, it features low minimum regular contributions from £150 a month, plus a low annual management charge of 0.5% with no additional charges, and a decent range of investment options including 40 internal funds and 120 from external managers.
Adrian Lowcock, senior investment adviser with Bestinvest, likes the company's general approach to pension provision: "Standard Life provides sound administrative services and excellent pricing."
McBreen adds that "it should appeal to those people who are waking up to the need to kick-start their retirement planning", though he points out that you'll be charged if you make more than 20 switches in a year.
Scottish Widows was just pipped at the post for the top spot and pushed into second place, but it's praised by McPhail as "innovative", with "simple and competitive pricing, good technical support and a good menu of funds".
Pearson also highlights the fact that it offers the option of drawdown or phased retirement, which means you don't need to transfer your funds to a self-invested personal pension (SIPP) or alternative provider if you don't want to buy an annuity immediately on retirement.
BEST PERFORMING FUNDS WITHIN A PENSION
1. TOP CAUTIOUS MANAGED FUND: HENDERSON MULTI-MANAGER INCOME AND GROWTH
Manager: Bill McQuaker
Pensions offering this fund: ZURICH
% Performance: 3 YR 12.56%, 5 YR 39.28%, 7 YR 71.2%
Contact: 020 7818 1818
Commended: AXA GLOBAL DISTRIBUTION
Funds in the cautious managed sector are generally less volatile than those in the other managed sectors, as they can only hold a maximum of 60% equities, with at least 30% in cash and fixed income.
Henderson's multi-manager income and growth fund remains the top-performing investment in the sector for a second year, significantly outperforming both the sector average and the FTSE All Share over three and five years.
It aims to deliver income above the FTSE All Share yield, but with an eye to grow capital as well.
McBreen observes: "This is a tall order, but thanks to tactical positioning around the benchmark, the fund's delivering." It's a relatively expensive fund with a TER of 2.55%, but Pearson believes that its performance justifies its cost. "The fund could play a useful role within a balanced portfolio," he says.
The runner-up, AXA Global Distribution, invests almost equally in equities and fixed-interest holdings, with a bias towards the US. Pearson praises its "low charging structure", with a total expense ratio [the annual cost of running a fund] of 1.5%, and its "consistent above-average performance".
2. TOP BALANCED MANAGED FUND: CF MITON SPECIAL SITUATIONS PORTFOLIO
Manager: James Sullivan
Pensions offering this fund: CANADA LIFE, SKANDIA, WINTERTHUR
% Performance: 3 YR 23.29%, 5 YR 63.3%, 7 YR 162.68%
Contact: 0118 9528 900
Commended: CF MITON STRATEGIC PORTFOLIO
The balanced managed sector requires an element of fixed interest to reduce volatility, with no more than 85% of the portfolio held in equities, including at least 10% in the UK market. For the second year in succession, CF Miton Special Situations has retained its foothold at the top of the sector under the leadership of Martin Gray.
This is basically an absolute return fund of funds, aiming to deliver returns while controlling volatility. "The mantra of the fund is a fundamental belief in asset allocation as the way to achieve returns when markets behave irrationally and throw up opportunities," says McBreen.
"As a fund of funds, the charges may appear on the face of it to be higher, but the returns justify the charging approach. This fund is one to watch."
Gray is also the lead manager for this year's runner-up in the balanced managed sector, CF Miton Strategic Portfolio. It's a relatively cautious fund for the sector, and will at times hold considerably more in cash instruments in order to protect investors from adverse market conditions.
This is a strategy which has stood it in good stead – relative to other balanced managed funds – during the volatile markets of the past two years.
3. TOP ACTIVE MANAGED FUND: JUPITER MERLIN GROWTH
Manager: John Chatfeild-Roberts
Pensions offering this fund: AVIVA, MERCHANT INVESTORS, SCOTTISH LIFE, PRUDENTIAL, SKANDIA, ZURICH
% Performance: 3 YR 2.98%, 5 YR 45.89%, 7 YR 118.23%
Contact: 0844 620 7600
Commended: M&G MANAGED GROWTH
Active managed funds can hold up to 100% of their portfolio in the stockmarket, so they are a riskier proposition than their counterparts in the balanced and cautious managed sectors.
But because they have higher exposure to equities, over the long term – which for a pension investor could be several decades – they are likely to deliver higher returns.
This highly regarded fund of funds holds predominant UK and international equities (more than 90%), with the UK and US accounting for half the portfolio.
It operates on a ation of top-down (macro-economic) and bottom-up (stockpicking) research; the aim is to produce a high-conviction portfolio of around 20 funds that will provide good diversification without sacrificing too much potential for growth.
Pearson observes: "The total expense ratio involved in running the fund is high at 2.63%, but the managers have consistently achieved top quartile performance, with sufficient growth to offset these high charges." The high charging structure "has proved a trade-off well worth paying over the lifetime of the fund", agrees McBreen.
Runner up M&G Managed Growth invests mainly other M&G funds, but also holds some individual shares; it benefits from a relatively low-cost charging structure. "We rate the manager very highly and he continues to deliver solid performance," adds McPhail.
4. TOP SPECIALIST FUND: BLACKROCK GOLD AND GENERAL
Manager: Graham Birch
Pensions offering this fund: AEGON, AVIVA, CANADA LIFE, MERCHANT INVESTORS, PRUDENTIAL, SCOTTISH LIFE, SKANDIA, WINTERTHUR, ZURICH
% Performance: 3 YR 80.26%, 5 YR 223.96%, 7 YR 313.12%
Contact: 0800 44 55 22
Commended: HSBC INDIAN EQUITY
Specialist funds come in many shapes, so it's not useful to try and compare them with each other. BlackRock's gold fund, which invests mainly in precious metal mining companies, has been a volatile but overall highly impressive performer on the back of the continuing demand for gold. It has almost doubled in value over the past five years.
"Gold companies have made reasonable progress in 2010 against an economic backdrop which remains uncertain," says McPhail. "The shares of mining companies are still cheap in relation to the price of gold itself, and their balance sheets are in good shape.
This fund's exposure to silver and platinum has also proved beneficial, as prices have recovered well from the downturn."
On a different tack entirely, HSBC Indian Equity, this year's second-placed specialist fund, has done very well by investing in the Indian subcontinent's dynamic economy. But Pearson warns that it's also a volatile investment and suitable only for relatively high-risk, long-term investors prepared to live with short-term falls in value.
BEST COMPREHENSIVE SIPP PROVIDER: AJ BELL
Provider: AJ BELL
Investment options: UK and international shares, gilts, AIM shares, futures and options, hedge funds, cash, unit and investment trusts, insurance company funds, commercial property and lands
Charging structure: Initial £425, annual admin £40 per month, Investment transactions £30 each, property purchase £550, property admin £30 per month
Contact: 0845 40 89 100
Commended: JAMES HAY
Full SIPPs are designed for sophisticated investors who want to be able to look beyond funds to other asset classes including shares, investment trusts, bonds and in particular commercial property.
The additional investment options come at a price, particularly direct investment in commercial property, which can add hundreds or even thousands of pounds to the annual charge – so competitive cost remains a key issue.
But other factors such as efficient administration, technical considerations and customer service are also important considerations.
This year's winner, AJ Bell, offers two SIPP products with access to the full range of assets. Sippcentre (see below) is available only through financial advisers, while at the top of the spectrum, the AJ Bell Platinum SIPP is a fully bespoke product tailored to the needs of wealthy individuals.
Lowcock praises AJ Bell for its "administration, technical support and all-round service levels". Pearson agrees, pointing out that both AJ Bell and the second-placed James Hay have "extensive experience" in this market, and offer "a competitive charging structure", as well as being suitable for investors who require the capacity to invest across a wide range of asset classes.
BEST LOW-COST SIPP PROVIDER: SIPPCENTRE
Investment options: UK and international shares, AIM shares, ETFs, futures and options, hedge funds, gilts, corporate bonds, cash, unit and investment trusts, UK commercial property
Charging structure: Set up £120, quarterly admin charges £25-£45
Contact: Via IFA only
Commended: JAMES HAY ESIPP
Most low-cost SIPPs are online offerings, focusing on a good selection of funds rather than other assets, though some offer investment trusts, equities and bonds. They're geared to independent investors happy either to make their own choices or to leave this to their IFA.
The cheapest involve no set-up fees or annual charges on funds, with low annual and dealing charges on other assets such as individual shares.
For the sixth year running, AJ Bell's Sippcentre has scooped top prize. To some extent, it bridges the gap between comprehensive and low-cost products, as it offers commercial property alongside funds and other investments. However, it's distributed exclusively through IFAs.
The judges like its high quality of service and administration – McBreen says: "The online nature of the plan means that costs and charges are kept to reasonable levels, while it still offers the functionality and range of services expected from an up-to-date, progressive SIPP."
Sippdeal, AJ Bell's lower-cost online sister SIPP for independent investors, also made it through to the final shortlist. The judges describe it as "excellent value for clients who know what they're looking for".
But it's Hay's eSIPP that makes it to second place, and is praised by Pearson for its online facilities and low-cost charging structure. "This plan is ideal if you wish to build a portfolio invested in shares or collective funds," he adds.
BEST ANNUITY PROVIDER: AVIVA
Best annuity provider: AVIVA
Commended: JUST RETIREMENT, CANADA LIFE
Although more than two-thirds of us still simply take the annuity our pension provider offers on retirement, rather than shopping around for the best rate, there are big changes afoot in the annuity market.
One is the government's announcement that we'll no longer have to buy an annuity when we reach 75 if we haven't already bought one. Another is the increasing range of more flexible alternatives to lifetime annuities that tie you in to a fixed income for the rest of your life.
So it's interesting to see that while Aviva has won the annuity provider award for the second year running, Just Retirement, a newcomer providing flexible annuities, is hot on its heels as joint runner-up with Canada Life. Aviva is praised by both Pearson and McBreen for its combination of competitive annuity rates and corporate strength.
McPhail singles out Just Retirement for its "consistently great rates across many ages and a broad spread of conditions" and its "can-do attitude", while Canada Life's good rates on single life annuities, coupled with excellent service, also found favour with the judges.
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.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.
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).
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.
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.
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%.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
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).
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.
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.