Branson's blueprint

Clifford German examines Virgin's new pension contender
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The Independent Online
Virgin Direct launches its long-awaited personal pension plan this weekend, although the timing, almost 10 years to the day after the great crash of 1987, seems to be entirely coincidental. The emphasis is on simplicity and flexibility. Virgin will not accept transfers from existing pension plans or from the state earnings-related pension scheme.

But with Richard Branson's high profile image behind it, the product seems certain to establish itself as a basic plank of pension planning for anyone who does not already have a long-term pension plan. It could also serve as a blueprint for the simplified pension products the Labour party is pledged to promote.

Contrary to some forecasts, Virgin will offer free, optional advice on the pension, based on a full financial fact-find, which could take roughly 40-45 minutes over the phone. Anyone who takes out a Virgin personal pension will receive a six-monthly report on the progress of the investments and an annual financial review, but no one will be bombarded with brochures offering other financial products and Virgin will not sell its customer lists for other salesmen to use.

Investors can put a minimum of pounds 50 into the pension plan, and pay a flat charge of pounds 2 per payment. Regular savers can put in pounds 50 a month increasing by 10 per cent each year but if they prefer to stick with the same level of contribution that is possible. They can put in regular contributions or lump sums at any time, and they can start, stop or restart contributions at any time without any penalties.

No-one pretends that pounds 50 is enough even over 30 years to buy a full pension, but it is better than nothing and anything is best started early to take full advantage of compound growth.

Investors can put into a personal pension any amount up to the maximum percentage of earned income specified by the Inland Revenue, starting at 17.5 per cent under 35 and rising to 40 per cent for over-60s. Tax relief means that a standard rate taxpayer gets a pounds 24 tax contribution for pounds 76 actually invested, and top rate taxpayers get pounds 40 for every pounds 60 invested.

The money will be invested in Virgin's own existing UK tracker fund, which is managed by Norwich Union, with no front-end charges, no bid-to- offer spreads, and subject only to the 1 per cent per annum management charge which applies to the tracker fund itself. However, there is a 2.5 per cent penalty for withdrawing in the first three years.

According to Virgin's own brochure, assuming the standard growth in the investments which all pension fund providers use in their projections, over 15 years the charges will take no more than 9 per cent of the funds invested for existing customers. New customers will expect to pay about 10 per cent in charges, which compares with the charges of Equitable Life, the cheapest conventional pension fund provider, and is significantly less than the broad industry average of around 15 per cent. Put another way, buyers of a Virgin Direct pension plan who put in pounds 250 a month for 15 years can expect a pot worth pounds 84,000 after charges have been deducted, compared with an industry average of around pounds 79,000 assuming that in all cases the actual investments grow by 9 per cent a year compound.

The Virgin pension funds invested will rise or fall in line with the shares in the FTSE 100 share index, which will make monitoring the performance of the funds a piece of cake compared with the with-profits pension funds offered by conventional insurance companies, where the cash is invested in assets which are never precisely identified and the funds are smoothed to even out the inevitable fluctuations in the value of shares, fixed- interest stocks and property.

Virgin pension funds may well fluctuate more sharply, not least because the FTSE 100 share index itself is liable to fall in the short run, as the 30 per cent slump 10 years ago graphically illustrates. But over a working lifetime, or even over 5-10 year periods in the past 50 years, the underlying trend should be up, and it should outperform conventional risk-free savings plans by a substantial margin over time.

As an additional safeguard Virgin, unless specifically requested not to, will automatically switch an individual's pension fund out of the FTSE tracker fund into fixed-interest stocks over the final 10 years before the date he or she expects to retire.

This is to guard against the possibility that the fund will be at a relatively low ebb on the precise date the policyholder retires.

Virgin will not be providing the actual pension annuities, so there will be no inbuilt penalties for changing providers to get the best eventual pension the accumulated funds can buy, as frequently happens at present.

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