The Great Savings and Pensions Scam. An A-Z Guide. Today W-X

W – With profits. We have about £400 billion in various so-called ‘with-profits’ financial products, mostly pensions. The name ‘with profits’ sounds great for savers. After all, everyone hopes their savings will make lots of profits. But too often these have been extremely profitable for the companies but not for savers. The theory behind ‘with profits’ savings is that the companies offering them can hold on to some of the profits made in good years and use these to pay savers a return when investment results are not so good. The problem is that savers have no idea how much the companies are keeping for themselves. As one expert explained, ‘with traditional with-profits funds, insurance companies can take as much as they like in expenses from the fund. You do not know how much that is.’ Not only do the companies pocket massive management fees, they also play the ‘inherited estate’ game. This involves holding back profits made in good years till the companies have built up billions which actually belong to savers. This money is called ‘inherited estate’. By law the companies should give 90% of this money to savers. But what companies do is make savers an offer where they can have say a third of the inherited estate immediately if they give up their rights to the rest. Not knowing they are being conned, most savers agree and the company can then steal two thirds of the billions they have in inherited estate.

X – Exaggerated projections. Most financial products are sold by people using exaggerated projections of the likely future growth. Deregulation of the pensions industry in the 1980s led to millions of workers in safe, inflation-protected final-salary pension schemes being sold risky investment-based pensions by commission-hungry salespeople using fanciful examples of likely investment returns. Savers lost over £20bn. In the late 1980s and early 1990s, around five million of us were sold endowment mortgages which would supposedly pay off our mortgages once they matured. Again, salespeople used grossly unrealistic growth figures to lure us into taking these products. When the returns were lower than expected, millions found themselves with large shortfalls which they had to pay off. All in all, endowment mortgage customers had to find about another £40 billion to clear their debts. Over the long term, pension funds grow at about four per cent a year and unit trusts around five per cent. But most of this growth gets eaten up in management fees and other costs so we’ll be lucky if we get 2% a year. The FSA allows pension providers to do projections of anywhere from 5% to 9% a year, even though this has never been consistently achieved and most have lost money over the last decade. If any seller is talking of growth of more than 2% or at most 3% a year, you should be more than suspicious.