The title, unashamedly stolen from Jaws 2, doesn’t relate to sharks (well possibly a little bit!) and was prompted by me sitting in with two directors of a small limited company when their bank came to talk to them about pensions, both their own and their obligations under the pension reforms which the government is starting to bring in next year, but which will not affect them until 2014.
It’s a few years since I’ve experienced a bank
selling pensions offering pension advice and rather naively I though they may have learned from their mistakes – endowment mortgages, high charges, poor performance, etc. Last weeks episode doesn’t leave me feeling very optimistic.
1. Tax relief was the key expression throughout the hour long meeting. At one stage it appeared to be the only reason for taking out a pension.
2. Mind you when I’m told by a pensions adviser from a High Street bank that the tax relief on company pension contributions is 31%, even though the true rate is 20% I started to see that pensions are still being missold. For the benefit of those equally puzzled by the 31% rate I can reveal that it is the 21% Corporation Tax relief (it’s actually only 20% now) and the 10% Tax Credits deducted from dividends. This is utter rubbish.
3. Later in the meeting the
advisor salesman told us that some of his clients were receiving tax relief on their pension contributions at 63.5%! ( 21% Corporation Tax relief plus 42.5% – the effective rate of tax on dividends for a 50% taxpayer). This was pure fabrication but my clients didn’t know it and, unless I had been there, I wouldn’t have known what tactics the banks are still using to sell pensions.
4. The salesman then explained that the tax relief, coupled with the low charges on the money invested in the pension fund, plus the wide range of options available to spread the investment risks made pensions a very attractive investment. Strangely at this stage he didn’t discuss the investment performance of the pension provider.
5. He then mentioned the need to make a quick decision because at the moment the bank’s advice was free but from next year ( the introduction of RDR) they may have to charge thousands of £s.
6. Finally, he mentioned investment performance but strangely, didn’t have any figures which related to pension funds. The figures he quoted only covered the two years to June 2011 and surprise, surprise they were gross returns i.e before the bank’s charges had been deducted.
My advice when it comes to pensions has always been “Deal with an Independent Financial Advisor (IFA)“. Last week’s meeting makes me even more convinced that this is the only course of action to take despite what your bank manager may tell you.