We recently advised a new client who, alongside a well put together buy to let portfolio, had various pensions, one of which was a Scottish Widows plan dating from the mid-1990s. It was invested in their With Profits fund, the bonus rate on which had been 0% since 2003, i.e. the plan hadn’t increased in value for nearly 9 years.
On the face of it that looks pretty dreadful and a prime candidate for switching to some other investments.
However, the plan contained several valuable guarantees.
Firstly, a guaranteed minimum fund value at age 65, which was significantly more than its value today. So even if Scottish Widows carried on declaring 0% bonuses, behind the scenes the plan would increase in value by around 24% by retirement.
Secondly Guaranteed Annuity Rates, which means that at age 65 the policyholder can convert the value of the plan into an income for life at around double the current prevailing market rates. Similar to a 100% pay rise really.
Combining those guarantees meant that if the plan was switched to other investments or transferred to another provider, it would have to increase by 9.3% each year so that the client wasn’t worse off in retirement.
This growth rate is after charges too, so growth of well over 10% would be required each year to be no worse off. It might just be possible to achieve such growth but only by taking some enormous risks, which could pay off, then again you could be much worse off if things went wrong. Most people close to retirement wouldn’t be comfortable with that much risk.
So, to the client’s bemusement, his pension hadn’t increased in value for nine years but we happily demonstrated why he should keep it, hence his comment above.
To me, this personifies why at Chatfield we charge fees for our time and expertise and do not accept any commissions. I wonder how many commission based advisers would have recommended holding on to that plan (as they would not earn anything for doing so)? That approach has given the financial services industry a bad name and is why Chatfield is totally transparent about everything we do and especially about our charges.