Time to deal with rip-off charges on old pension contracts
Recent remarks from Otto Thoresen, director-general of the ABI, do not fill me with confidence.
Steve Webb has stepped into the role of a knight fighting for savers who have seen their savings crippled by charges.
His comments in the Daily Telegraph last week about ‘sky-high charges’ that are ‘tearing the heart of the pensions’ should have every insurance firm examining older contracts very closely.
However, recent remarks from Otto Thoresen, director-general of the Association of British Insurers, do not fill me with confidence. In response to a Labour attack on charges he highlighted the argument that charges have been falling for the past decade.
Mr Thoresen should know about high-charging older contracts. He held a marketing role at Abbey Life before going to Royal Life and eventually Scottish Equitable/Aegon. In 1999 the Mail on Sunday’s Stephen Womack highlighted the case of a heart attack victim whose entire pension fund would revert to Abbey Life if he died before his 65th birthday.
If he transferred he would lose £3531 of his £11,023 fund to a transfer charge called a medical rating.
Abbey’s spokesman justified this at the time saying: “If someone with this kind of pension wants to transfer, we have the right to examine the client to see what state of health they are in and to adjust the transfer value. If someone were at death’s door they would get a very small transfer value.” Nice!
In May this year the Daily Mail featured a 36-year-old man who had started saving with Abbey Life in 1997. He was charged £28 a time for switching between just 14 funds. He stopped saving in 2003 and by last year his pension pot was £6677. Switching out triggered a 53 per cent fee reducing his fund to £3650.
Of course, it is not just Abbey Life. In 2001 Allied Dunbar launched an Individual Pension Plan it claimed was stakeholder friendly because it had a 1 per cent annual charge. The less friendly part of the plan was £2.75 a month policy fee linked to wages inflation.
So Mr Webb’s intervention is welcome. But as usual politicians are rather late waking up to the problem.
One suggestion that has been touted is that transfer penalties should be removed, giving savers complete freedom to find the best home for their money. I think that would sound a chord with Mr Webb.
The industry may point to cleaner and cheaper pension contracts now being sold but this is no consolation to those who are still trapped by policies that will charge if they transfer or even stop saving so they can divert their money elsewhere.
The industry regularly rolls out the argument that these fees were to ensure the contract delivered a fair profit in the long term. That – excuse me – is utter tripe. These contracts were structured to make money from day one.
More from Tony Hazell
- Well-cushioned MPs blind to lifetime allowance needs
- Slow transfers to freedom-friendly providers likely
- Penny drops on tax impact of pension freedoms
- Taxing times of pick and mix pensions