Unit-linked plans

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Unit-linked plans

The unit-linked plans involve charges expressed slightly differently from unit-linked life insurance policies. The initial charge on units is normally 5% but may be higher, and the annual charge is between 1/2% and 1%. Many plans, however, also involve the allocation of capital units in the first one, two or three years, embodying an extra management charge of 3% or more. As previously mentioned, this is not a once-for-all charge; it is an annual charge and means that 3% (or whatever) of the value of the relevant units will be deducted by the company each year the plan is in force. This can add up to a substantial amount over a long-term pension plan. The reason capital units are used is that under a personal pension plan the company is unable to make deductions from the fund if the plan is stopped by the planholder (in the case of the life insurance contract it can do so via the surrender value). So to take account of "lapses" the company has to build into its charges an element that will recoup its costs. Nevertheless, some companies do not use capital units on personal pension plans, and their plans can often offer better value (capital units are not allocated when unit-linked funds are used on a single-premium basis).

At maturity, the unit-linked planholder has the option of converting all his units into an annuity, in which case he gets a fixed level income for life (though he may also, if he takes a slightly lower annuity, have a guarantee that it will be payable for a minimum of 5 or 10 years whether he lives or not) or of keeping the units and drawing off an annual pension by selling some each year. The company will automatically do this for him. This latter course offers the only real hope of keeping pace with inflation, but the big disadvantage is that the "unitised" pension starts at about half to two thirds the level of the level pension (because the latter is based on fixed-interest yields which are that much higher than the yields on shares or property).

A middle course is to take half the benefits as a level annuity and keep the rest in units, which may be the best choice of all. Another option now becoming more widely available with both with-profit and unit-linked schemes is to take a pension at a level lower than the annuity rate but higher than that of the "unitised" pension. The company anticipates a rate of growth (capital and interest combined) and builds this into its assumptions, thus allowing a higher rate of pension. Say it assumes a 4% growth rate. Then if the units grow at 10% the plan-holder is credited with only 6%, the company keeping the rest; and if their value drops by 5% then this is further reduced to a fall of 9%.


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Pensions - A word of Warning

Many companies are involved in personal pensions, but a word of warning is in order. Owing to the tax advantages, the personal pension with-profits plan ought to produce a final return significantly above that which could be achieved by investing in an endowment policy over the same period and converting the proceeds into an annuity. In a few cases, however (usually companies that do not specialise in personal pension business), this is not the case.

The unit-linked pension plans have, like their conventional counterparts, developed considerable sophistication. Almost all of each premium... see: Pensions - A word of Warning

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