Get The Most From Your Pension

One clear-cut way to make big bucks is to replace conventional, expensive pensions with a low-cost alternative.

I'm a great believer in being a 'wiser miser' by shopping around for everyday goods and services in every way. In particular, I also believe that it's crucial to look beyond routine discounts and reductions by seeking out less obvious savings. Take, for example, the potentially huge benefits to be had by finding a superior pension plan.

Earlier this year, I set out on a search for a personal pension with ultra-low costs. My reasons for finding a top-class pension were twofold:

1. having not made any contributions whatsoever to a pension for around eighteen months, I felt under pressure to drop a lump sum into a new plan; and

2. I aimed to boost the performance of a couple of existing pensions by reducing their ongoing management costs.

The larger of my two existing pension plans was accrued during my three years at the Fool, before I left to become a freelancer. This simple index-tracking fund levies an annual charge of just 0.7%, so it ranks among the lowest-cost pensions on offer. However, with a little finesse, I realised that I could trim this charge down to just 0.52% a year, as I explained in Pensions For All The Family.

In contrast, the smaller of the two pension plans is something of a joke, so I'm relieved that only a small sum ever went into it. To be honest, I'd completely forgotten about this pension until last year, when, out of the blue, I received an annual statement from the plan manager. This came as something as something of a surprise, as I'm certain that I'd had no contact from this financial firm for at least a dozen years.

Alas, in common with millions of other personal pension plans (especially those which predate the introduction of cheap Stakeholder pensions in April 2001), my long-lost pension has performed very poorly indeed. Thanks to sky-high upfront and ongoing costs and poor investment returns, this pension has barely beaten the returns I could have gathered from leaving it in cash.

For the record, I made a single contribution of £250 to this toxic pension plan in 1991. Sixteen years later, despite being invested in an 'aggressively managed worldwide equity fund', it is only worth £663. In other words, it's grown by a measly 6.3% a year compounded. In order to have produced such a poor return from world stock markets over this period, the plan manager must have either managed the fund incompetently or stuffed me with extortionate charges. I suspect that it's probably a bit of both.

Had this modest little pension pot grown by, say, 10% a year over the same period, then today it would be worth £1,169, or £486 more. Although this isn't a huge amount in absolute terms, I should point out that it's almost twice what I started with, so it's a massive amount in relative terms.

Furthermore, if today's £663 continues to grow at a mere 6.3% a year, then it will be worth a grand total of £3,451 when I reach my normal state retirement age in 27 years' time. On the other hand, growing at 10% a year, it could be worth £8,692. So, it's possible that one simple switch could make me in excess of five grand over perhaps three decades. That's why I'm ditching this awful pension manager and transferring my pot to one of its ultra-cheap rivals.

Therefore, if you have any dormant pension plans which are gathering dust, or you continue to contribute to an old-fashioned pension, then do your research and then switch to one of the new generation of low-charging pensions. Otherwise, you could lose tens of thousands of pounds in the years to come. Ouch!

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