Lautro fear over lapsed pensions: Early surrender values are poor

PEOPLE who stop paying into personal pension plans within the first two years normally lose substantial amounts of money and the life insurance regulator Lautro is worried about the rate at which this is happening.

It asked members for details on the number of policies up to two years old that were lapsed in the third quarter of last year.

So far the regulator has received replies from 71 of the 100 questioned and has been told that a total of 44,000 policies were lapsed during the period.

It is difficult to gauge whether this is a large number in proportion to the number of pensions sold. As a rough guide, 44,000 is less than 8 per cent of the 564,218 regular-premium personal pensions sold in the third quarter of 1990. This is roughly the period when the lapsed policies would have been sold.

This may not seem a high figure, given the sharp rise in unemployment, but Colin Hawtin, head of policy at Lautro, said it was high enough for concern. Lautro would now be looking more closely at the reasons for the lapses, focusing on whether the policies were mis-sold.

The penalties for letting a regular premium pension scheme lapse in its early years are heavy.

Contributions from National Insurance rebates, for people who contract out of the state earnings related pension scheme, are protected but contributions made by the individual may be lost. Charges in the early years eat into premiums. Where the contributions have built up some value, it is likely to be low compared with the amount put in.

This is reflected in the transfer values quoted by pension providers. Money Management magazine notes in its latest issue that companies offering poor surrender values on both regular and single premium contracts for unit-linked plans are Colonial Mutual, J Rothschild Assurance and Irish Life.

For regular premium plans, companies projecting low surrender values include British Life, Cannon Lincoln, Canterbury Life, Citibank Life, Eurolife, General Portfolio, Laurentian, Legal & General, Merchant Investors and Prosperity Life. The magazine says most of these companies sell through sales forces or tied agents.

A survey by the magazine last year showed that the average transfer value on a pounds 200-a-month, unit-linked 25-year policy after two years was pounds 2,362. The total amount paid in would have been more than pounds 4,500.

Jonathan Phillips, an adviser with The Wyatt Company, a firm of actuaries and benefit consultants, said: 'We always tell clients that if they do not think they can afford to pay premiums for two years, perhaps because they are not very secure in their jobs, they should not start a personal pension.

'There are one or two companies where there is no transfer value in the first five years.'

Mr Phillips said such people would be better off putting money into single premium policies, where there was no on-going commitment.

Normally, lapsed pension schemes are made 'paid up' and it is possible to start making regular contributions again later.