Deal direct - and you can keep the middleman's cut

Cheaper charges, no salesmen at your door - a new breed of providers are now offering pensions over the phone. Simon Read and Tony Lyons report.

Buying a pension over the phone offers convenience and cost savings. You can simply sit back at home and dial the company of your choice. By cutting out the middleman and not having to pay commission to advisers, this new breed of pension providers is more cost-effective.

The concept has been hugely successful, prompting many others - such as Eagle Star, Scottish Widows and Legal & General - to join the throng.

Like Direct Line, which has recently joined the list of direct pension providers, many are relative newcomers to pensions, such as Virgin, Marks & Spencer and investment trust managers such as Foreign & Colonial, Flemings and Edinburgh Fund Managers.

The best direct plans offer flexible policies that meet the lifestyle needs of their customers. They allow premiums to be increased, lowered or even stopped at will, without penalty. But even better, they do not carry the high charges of their traditional competitors.

But have these cost-cutting companies had the same effect as direct insurers had in the mid-1980s, of bringing overall prices down? The short answer is no. At least, not yet.

But the signs, albeit tentative, are that some companies are responding to the telephone providers' challenge. "We've seen a move away from the horrible reduced initial allocation system," says Gordon Maw, marketing manager at Virgin Direct. "Many traditional pension providers are now introducing level initial allocation."

Under the traditional charging structure, the bulk of charges was incurred upfront. This meant that only a small percentage of your pension contributions at the beginning, the reduced initial allocation, was actually added to your pension pot.

But some direct providers still accuse traditional companies of levying excessive fees by underhand means. "The charges have just been redistributed across the lifetime of the policy," explains Mr Maw. He points to the fact that, unlike many traditional pension providers, Virgin has no bid- offer spread. The spread is the price between buying and selling investments and is, in effect, a turn, or profit, made by some pension managers.

But choosing a pension on price alone could be a huge mistake. You must also look at the potential performance of the fund you choose to invest in. Investment strategy is also crucial when planning your retirement fund. There are high-risk and low-risk opportunities and it's possible to mix and match to get a good mixture of both with most providers.

Virgin Direct, for instance, offers just two funds - a stock market index tracker to produce growth for the early years and an income fund which investors are switched into as they get within sight of retirement to protect their capital.

Not all the direct pension providers offer such a limited range. Eagle Star, which entered the market 15 months ago, offers a variety of funds, plus the opportunity of allocating varying amounts of cash between them. Edinburgh Fund Managers offers 36 funds from different investment houses while Fleming Investment Trust Management offers 25 funds. Merchant Investors Assurance, the first company to move into direct pensions back in February 1995, offers 23 funds.

'The Independent' is offering readers a free 'Guide to Direct Pensions', written by Nic Cicutti, this paper's personal finance editor, and sponsored by Eagle Star Direct. For a copy call 0800 776666, or fill in the coupon below.