Personal pension holders may be paying pounds 400m a year unnecessarily .
Planning for retirement is an essential part of every individual's overall financial strategy. Private pensions, or stakeholder variants of them as proposed by the current Government, are one way of achieving this.

But research carried out for The Independent shows policyholders may be paying up to pounds 400m a year more than they should into poor-value plans.

This is caused by the whopping charges many companies impose on the private pensions they sell. In particular, those who are forced to halt contributions into their schemes in the early years can be left with minimal lump sums with which to buy an income at retirement.

The table alongside this story illustrates what returns policyholders might get, and what companies may take in charges when premiums are halted early on in the life of the policy and when they keep going until maturity.

For example, with Equitable Life you could count on a return of over 8 per cent on your premiums whenever you stopped them, assuming annual investment growth of 9 per cent.

As one moves down the list, charges become heavier and generally more front-end loaded - that is, levied at the start of a policy rather than throughout its life. With companies like Allied Dunbar, Skandia, Scottish Equitable and Sun Life, investors who halt contributions into their plans after two years would get very poor annual returns of around 3 per cent.

What companies actually take from their planholders on average will also depend on their "persistency rates", the percentage of people who "persist" with a policy over given periods of time.

The table shows that three-year "persistencies" range from 89.6 per cent with Standard Life (this means only 10 per cent of plans have lapsed after three years) to 58.9 per cent with Sun Life (almost 40 per cent of plans lapse after three years).

It is worth noting that the income received by companies from the policies they sell generally increases with the number of years they are kept up (though Allied Dunbar's plateau out early). This means life offices with high persistency rates, like NPI and Standard Life, take higher average amounts in charges than their charging levels might suggest.

Is it possible to estimate whether companies charge more than they should from the policies they sell? One way is to construct a hypothetical "benchmark" plan, with charges of only an initial 5 per cent bid/offer spread and an annual fund management charge of 1 per cent.

Such charges are reasonable. They are higher than those for French savings products and in line with the average for UK unit trusts. They are actually bettered by a few pension companies, including some in the table below. The average company "take" for such a benchmark plan would be pounds 1,470. The table also shows an "average" plan from a previous survey which would bring an average take of pounds 2,100. In effect, this is an "extra" cost of pounds 630 above that on the benchmark.

Such an extra cost arises on a plan with premiums of pounds 200 a month. In one recent report by a financial regulator, average premiums are put at pounds 112 a month, so the average extra "take" would be lower. But the report also shows that charges bear more heavily on smaller policies as some elements are fixed. Compared with the benchmark plan, the extra cost for all plans might average pounds 400-450. Assuming sales of about 1 million plans a year, the overall extra cost to planholders is up to pounds 400m a year.