What does your firm do for clients with tiny legacy pension pots?
Wildparaplanner
Member
Hi all,
I was wondering what other peoples firms or IFAs do when it comes to clients who have a handful of pensions, but where some of them only form a tiny fraction of their overall pensions assets?
We have a charging matrix depending on how many pensions are being reviewed and their combined value, but it strikes me as somewhat unfair if you have a client who has say a £400,000 main pot, but then outlying pensions of say £450, £1,450 and £5,600, as because you are looking at 4 pensions and not 1, the charges go up somewhat disproportionately.
Is there an argument to say that if a client who has a pension worth say less than 5% of their overall pension wealth, that it's more likely than not in the client's best interest to bypass on a lot of the usual research in favour of a fast track to a consolidation exercise?
Hope this makes sense, and look forward to hearing other peoples views.
Wild
Comments
Hi,
I see lots of different approaches to this.
The one I suggest for clients who are already receiving an ongoing service is to simply write a short letter bringing it into the existing solution (already suitable), with the rudimentary suitability aspects.
Essentially, a client who has a standard DC pension of less than £2k, and where taking it as a small pot is not available or suitable, alongside other consolidated pension assets running into 6 figures isn't likely to be gaining any benefit from keeping the small one. Any cost increases are going to be inconsequential in comparison to the admin that someone is going to have to deal with at some point to tidy this up.
Honestly, it's a 200-300 word letter and covered by the ongoing fees a client is paying.
This is a common approach I take for AE schemes like NEST or NOW but the logic applies to all schemes.
You still need to have the background work done - ie you need to know that there aren't guarantees, protected cash or pension age, etc, but I keep it as light touch as I possibly can. And of course, still discount SHP and existing WPS because they are hard-coded rules.
Thanks, that is really interesting that you do in this shortened manner. Do you do a Selectapenion/O&M style charge comparison or just a table of charges? Do you do a comparison of fund performance (ceding scheme v recommendation)? These two aspects are where we tend to spend a lot of time trying to get info from providers (pleased to say Nest have improved on this recently..) and would be a great time saving if could avoid this.
@MothiusManius
I never do independent software charges calculations on any switch case. I have a simple (ish) spreadsheet that does the same calculations and this goes into a table in the report. You can't avoid a cost comparison of some sort in the report imo, but the depth you need to go to will depend on the outcome of the 'file side' analysis.
I only ever do performance comparisons in a report where it is relevant. And it's only relevant when it is being used to justify the switch (which is a last resort imo). The exception is where I want to demonstrate risk taken, where I will use scatter charts to explain how the same performance can be achieved at the cost of more volatility.
Usually it is enough to comment on the availability of investment options and on the characteristics of the current investment, demonstrating that the replacement has more options and is more appropriately suited to the client.
You should read through the FSA (as was) FG12-16. It said that:
Firms must not automatically assume that the CIP will provide better performance prospects than the client’s existing investment. Where a firm recommends replacing an existing investment on the basis of improved performance prospects, we expect to see the firm justify specifically why the new investment is, in the firm’s opinion, likely to out-perform the existing investment.
Where a firm recommends a switch to a more expensive investment because of the prospect of improved performance, we expect it to take into account the additional cost when quantifying the potential for improved investment returns. There are a number of factors that firms could consider in taking a view on the potential for additional performance and these may vary depending on the circumstances. For example, a low risk fund is less likely to offset additional costs through improved fund performance.
In other words - where an expected improvement in performance isn't the driver for the switch, a comparison isn't necessary. That said, on larger value cases you should still consider having figures on the file, because you might find the argument to switch on non-performance factors is weak, and the performance analysis will possibly tip you one way or another. Where we are talking about smaller pension funds, the case for this is reduced. Because, even a 2% alpha on a £3,000 legacy fund over ten years is unlikely to add up to more value than the benefit of having one less institution to deal with over than period.
The single most important thing with any switch, including small funds, is that you must be willing to leave it where it is if the analysis genuinely doesn't stack up in favour of moving it.
Thanks for your detailed reply, that is really useful. Good timing too, as had about three clients with Nest funds of less than £2k approach us in last couple of weeks!