It is Pension Awareness Day on Sunday 15th September. It might not sound like the most exciting day of the year, but it does help to raise awareness about the importance of putting provisions in place for your financial future. One critical area is keeping tabs on where your pensions are, and avoiding poor performing ‘zombie’ funds.
The extent to which investors are exposed to these kinds of funds is vast. The FCA estimates ten million policies are held by closed book pension providers, amounting to £400bn in assets.
What is a zombie fund?
Zombie funds are typically products offered by life insurers that are closed to new business. There are two common types of zombie fund: a fund run by a closed book provider or a with-profits fund.
The undead have a history and so do zombie funds. Most zombie funds are 20 to 30 years old, and you may have invested in them in the 90s. If you started investing after this, zombies are likely to be less of a problem for you – but keep a watchful eye out for them!
Are you likely to have a closed zombie fund?
If you are invested in a closed zombie fund you might have seen the name of the company managing your investments change following a takeover or merger. Once consolidated, the new owners benefit from economies of scale, but these benefits don’t get passed on to you. They rely on customer apathy and exit charges to retain your money.
Without the need to attract new inflows there is little incentive to ensure performance is competitive or to reduce charges. A toxic mix which can eat away at your retirement pot.
Failing to deliver what they promise
Returns from with-profit zombie funds have disappointed for several years. Annual bonuses, paid as part of the ‘smoothing’ principle of with-profits funds, have deteriorated over the past decade, as insurers have routinely failed to capture the upside of market movements and then lacked sufficient room for manoeuvre during the downside.
More flexible options
Our modern world is very different from the past. It is now possible now possible for us to build you a portfolio of assets with the same risk and return profile as a with-profits fund – typically with a diversified portfolio of collective investment funds sheltered from tax inside an ISA or a pension.
Escaping your zombie fund
Let’s look closer at the two types of zombie funds you might be harbouring:
Closed zombie funds
Typically these funds underperform their benchmarks and comprise of old school charging structures designed to hide the real cost of investing. The charging structure was designed to pay commissions to a sales force that was handsomely rewarded. You might well find you are still paying higher costs as a result.
It’s also important to review where your money is invested. The investment you chose 20 or 30 years ago might have been right for you then, but it probably isn’t right now.
Things to consider before exiting:
- You might be able to switch to another fund with the same provider, but there is a good chance that they will be zombies too.
- Switching to another provider might be a better strategy for escaping them but beware they might take a final bite of your fund as a ‘transfer penalty’.
With-profits zombie funds
These funds started off as well-intentioned smoothing strategies. In good years they hold back a proportion of the profits to ensure that a reasonable return is paid during years of poor performance. In practice, the expensive guarantees that underpin the policies has meant insurance companies have tended to smooth payments down, rather than up.
When you leave them (escape, sell, retire) a terminal bonus is normally added on top, but this isn’t guaranteed. The balance has tipped away from the certain regular returns to a higher final uncertain bonus.
Things to consider before exiting:
- With-profits are unusual in that they can include guarantees which might be very valuable. Keeping this zombie can sometimes be better than escaping.
- If investment markets are not great when you escape the crawler will take a final swipe by applying a market value reduction instead of a terminal bonus.
- Always take advice before switching out of a with-profits funds.
Switching your funds
If you have concerns about your pension, please get in touch. Moving to a more modern and flexible fund could save you money and improve your financial future.
Please email firstname.lastname@example.org or call 020 7488 7182. We’re always happy to hear from you.