2. A double whammy

2.1 Before retirement

The Treasury has once again caved in to financial industry pressure ^x and agreed to lift the 1 cap on annual management charges on Sandler products and stakeholder pensions from 1 % of capital per annum to 1.5 % for the first 10 years. ^x "Sandler products" are being introduced as the result of the Sandler Review. ^x Sandler products, stakeholder pensions and Child Trust funds are all "stakeholder products".

If there is an additional 1% hidden charges, this means that capital is reduced by 2.5 % per annum for ten years and 2% per annum thereafter, so that 22.4% of capital is lost in charges in the first 10 years, 36.6% in 20 years, 48.2% in 30 years. If hidden charges are equal to explicit charges this becomes 26.3%, 39.7%, 50.8%.

2.2 After retirement

The trend from DB to DC pension schemes is resulting in pensions or income in retirement, whether from annuities income drawdown or ASPs, increasingly being paid and "managed" by the industry regulated by the FSA, with resulting charges. For example: "As ASP must be reviewed annually, most pension companies charge an additional £75 to £200 a year to manage those plans." Income drawdown plans have been criticised for their charges. ^{x x} Thus we are caught by the industry with a double whammy of high charges both before and after retirement. The explicit charges of stakeholder pensions are capped. But this only applies before retirement. There is no such cap after retirement.

Under a DB occupational pension scheme the income in retirement is (in general) paid by a scheme regulated by the Pensions Regulator rather than by companies regulated by the FSA. There are then not these steep management charges.

This is a reason why a new national scheme should itself provide pensions, rather than casting members adrift to purchase a "product" on the market when they retire, as currently proposed for NPSS.

Some defined contribution occupational pension schemes provide annuities for their members. This was 24% of schemes in a survey by Watson Wyatt ( Figure 28 ^x ) and 16% in another survey by Towers Perrin. ^x These numbers must be larger as a proportion of members since the schemes providing such annuities are large.

"The FSA tables (for 'You chose single life pension annuities with no guarantee for a man aged 50 with a pension fund of £100,000. You are a non smoker.') give £451 a month from Scottish Equitable for a level annuity." ^x

This Scottish Equitable annuity is extended to further ages in Table 2.

Table 2: The yield from annuities ^x

Annuity yields are a measure of how good annuities are as an investment in comparison to market yields. It can be seen that they are a poor investment, especially at older ages. A notional annual management charge can be defined by: AMC = (market yield) - (annuity yield).