Intermediaries who have set up front-end loaded GPPs must be wary of adding new members as they may ...
Intermediaries who have set up front-end loaded GPPs must be wary of adding new members as they may be disadvantaged by the level of front-end charges in a subsequent transfer to a stakeholder pension.
Millfield Partnership has discovered that several of its clients in a GPP would find their savings reduced to zero on maturity if they had their contracts paid up now because front-end and ongoing charges are so high.
Mark Bingham, consultant with the Millfield Group in Slough, said: "The bulk of GPP is very good. Generally, these have lower charges than a personal pension and are more friendly on the transfer side but the older schemes, particularly those sold by a direct salesforce, may be subject to this kind of situation."
For example, a Millfield client a male, aged 25, earning £28,000 a year is contributing £175 a month into the Allied Dunbar Adaptable Personal Pension group scheme.
He has paid in £2,280 but the contract is currently worth £1,900 and has a transfer value of £640.
Millfield has projected that, if the policy was paid up now, on maturity of the 25-year contract, even by using the highest projected growth rate of 9% a year in the calculations, the contract would be worth zero as the scale of charges would erode any growth and capital.
The problem lies in the charging structure. The product has a 35% allocation rate for the initial period (usually one month for every year of the contract), a monthly policy fee of around £5 and a 1.5% management fee.
Regulatory Update 64 issued by the PIA dictates that pension holders must not be 'materially disadvantaged' if they transfer to stakeholder.
Allied Dunbar has not yet made a public pledge to transfer all pensions to a stakeholder format free of charge, as Legal & General has done, but is telling clients who enquire that this will be the case.
The reason for this is that the shape of stakeholder is not yet known and customers might actually do better to stay with their pension.
Ian Price, pensions marketing manager at Allied Dunbar, said: "If customers bought a long-term product and stop it early it could be the situation that they end up with zero. It depends on how long the person has held the contract and how much is invested.
"There are other options, such as conversion into a Free Standing AVC or transfer of the residual value to another provider. Customers may actually be better off staying with their original pension as they will have gone through the initial charges and the next phase could be more competitive than stakeholder."
Pension holders who want to top up existing contracts may also be affected in a move to stakeholder.
Allied Dunbar has sent out a circular warning clients that those who wish to or are already making increased contributions to contracts could be disadvantaged.
The circular stated: "If you decide to increase your existing plan, the transfer value in the early years relating to the increase may be significantly lower than the increased contributions paid as low as 25% in some cases."
Bingham said that costs may be renegotiated with life companies. Millfield is offering free analysis of pension plans to companies which have concerns about their group scheme.
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