Apparently one of the most common causes of complaint to the Financial Ombudsman (FOS) is ‘churning’.
This is a process by which a financial adviser recommends that a consumer cancels one financial product and replaces it with another.
Churning is where such a cancellation and replacement really provides little or no value to the consumer, but potentially a lot of value (in the form of commission) to the adviser.
However, all cancellation and replacement is not ‘churning’; some of it has real purpose and value behind it.
One area where advice to cancel and replace quite often takes place is that of pension planning.
Unlike the good old days when a person might remain employed by the same employer and potentially be in the same pension plan, for pretty much all of their working life, the norm these days is multiple job changes.
One of the consequences of this employment pattern is that a person may accumulate multiple pension plans to go with their career. It really is not unusual for us to come across a client who has five or six different pension plans (one of our Financial Planners recently had to advise a client with 18 such plans!)
This in itself brings some quite serious problems.
Multiple and disparate pension statements all arriving on the door mat at different points in the year and all presented slightly differently, in slightly different formats, with different financial assumptions being used.
This makes it very hard to predict and project exactly what benefits might ultimately emerge.
Each of those pension plans is typically invested in a different way. There tends to be no cohesion in the investment strategy, in fact referring to it as a “strategy” is perhaps a little generous.
And each of the plans with a different charging structure some more competitive than others. So very often we find one item on the client wish list “can’t I merge all of these plans together and just have one?”
Well, the answer is “yes you can” but that yes comes with a pretty important wealth warning, there are some important things to consider;
-Do any of those pension plans have any guarantees that might be lost if the plan was transferred to another arrangement? A good example of this might be if the plan contained guaranteed annuity rates that were much higher than those currently available in the open market. It might be well worth while not consolidating such a plan and lose that guarantee.
-What is the cost of this consolidation? Are there exit penalties to pay and are those penalties more or less than the future annual management charges that may be taken by the plan provider? It does sometimes pay to take the hit of an exit penalty rather than the future annual management charges- but not always. One of the worst examples of this that we have witnessed is where the current value of the pension fell to £0 at retirement because of the future charges being greater than the assumed investment return! You can see why someone would be motivated to transfer out of that!
-What are the future costs of the replacement plan? Are you transferring to a more expensive plan and if so is there real purpose to this? Are you getting extra value from this extra cost for example regular and meaningful reviews? If the adviser is promising these, and you value them, then there may be some justification but why pay extra for something that you are not going to use.
-Make sure that whether you keep your existing plans or consolidate them into a new plan, that the selected investment funds match your tolerance for and appetite for risk, reward and volatility. Is the investment proposition put to you by your adviser plausible and understandable? If it is and the above factors are taken fully into account there may well be value in consolidating your plans into a more modern, hopefully lower cost arrangement.
If we could ask for one thing it would be that people take an interest in their pension arrangements.
Get to understand them and see what role they have to play in ensuring that you have sufficient retirement income. Just because pension plans can be perceived as “boring” doesn’t mean you should ignore them.
Photo credit: Flickr/Alan Vernon
