Calculators

Contracting Out... No Future in Looking Back?

March 2009

Clive Leah, Managing Director of Shirebrook Financial Services, gives an update on this complex matter.

In the normal course of events you would probably agree with this pronouncement but in the context of "contracting out" my view is that the future is definitely in looking back – indeed anyone who does not look back could put their future in some jeopardy.

Let me explain – bear with me for 2 minutes.

The days for contracting-out on a voluntary basis are numbered – after 2012 no further rebates will be paid to Stakeholder or Personal Pension Plans – 3 years to go.

The year 2009 will see the 21st anniversary of contracting-out (22nd anniversary if you take into account the initial backdating to 1987!).

My simple mind dictates that it won't be the next 3 years which are most relevant if "contracting out" for an individual is to be worthwhile. It's time to look back.

The last 22 years most certainly are extremely important – they will represent virtually 88% of the contribution history for some individuals – in time if not in payments received.

It is most important, in my view, that what has happened since 1988 is given a thorough overhaul for a number of reasons which I would summarise as follows.

Charging Structures

Since 2001 contracts have become much better value for money – with the advent of Stakeholder BUT not everybody joined the party and many contracts were not brought into line – consequently many, many investors are paying far more than they should be to cover the running costs of their policies – are you? The charges levied impact directly upon the prospective value of your pension fund at retirement.

Investment

The investment performance of your "contracted out" fund constitutes a vital element in your prospective benefits when you retire.

Many policies were set up on a "with profits" basis – with no alternative investment choice. Some "with profits" funds have performed abysmally in recent times – many companies have not paid bonuses for years and with the actuaries relying increasingly on the use of "terminal bonuses" and "market value adjustments" these plans are no longer providing the reasonable "smoothed" investment returns which were promised back in the late 1980s. Their inherent values are volatile.

Other plans have more overt investment links but, once again, investment performance has varied greatly. How have you fared?

I hope you have done well but you cannot fail to be worried as Spring approaches in 2009 – has the world gone mad?

We find that many investors have had the same investment link since 1988! Can this be right – sometimes, but not often, it has to be said. Life changes – we get older – and nearer to retirement – the same investment links are not always as acceptable when you are five years from retirement as when you were twenty years from the evil day. Common sense? – food for thought?

Service

You may have been lucky and had a good adviser to help you with your decisions over the years.

Unfortunately, if you have you will be the exception not the rule.

Thousands of policyholders were exhorted to contract out by direct sales force employers and by "home service" companies – unfortunately many of the original personnel are no longer around and, it has to be said, whole sales forces were disbanded by some providers.

When did you last receive any sort of message offering help to review your existing plan fully? All we seem to get at the moment is a barely understandable suggestion that we should consider what we might do in the future – what about the past 22 years? Are not they too very relevant?

Frankly, what has happened in the past is more important than what might happen in the next few years.

There may be no future in looking back – it's a moot point but for many of us the future may not be as rosy if we don't look back.

Shirebrook will be happy to help you to look back – it's the common sense way to approach the subject.

Write, call or e-mail us at either of our offices – Chorley or Dudley – we'll be happy to help.

The opinions in this article are based on legislation as at 24 March 2009 which may be subject to change. They do not constitute a recommendation you should always seek advice prior to making changes to your plans.

Contracting Out... No Future in Looking Back?

Clive Leah, Managing Director of Shirebrook Financial Services, gives an update on this complex matter.

Charging Structures

Investment

Service

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