Charges can alter pension returns: Standards laid down six years ago may no longer apply, warns Caroline Merrell

MANY people may have been advised to buy personal pensions based on inflated returns.

Standard charges set by Lautro, the life insurance regulator, are used to decide whether a client should opt out or transfer from an occupational pension scheme.

But a survey published this week shows that these charges are much lower than the real charges imposed by life offices.

Over the policy's term the higher-than-assumed charges could significantly deplete the pension returns, invalidating the original calculations.

The survey, published by Money Marketing, the trade newspaper, shows that over the past five years a personal pension would have shown an annual return of about 11 per cent before charges.

Actual life office charges would cut that annual yield to just over 7 per cent on 10-year policies and to 9.4 per cent on 25-year policies.

Lautro assumes that charges would only reduce the annual yield to 9.3 per cent on 10-year policies and to 10.1 per cent on 25.

The payout after 25 years on a pounds 50-a-month policy using the average real charge would be about pounds 4,000 lower than using the Lautro benchmark. Over 10 years the payout would be pounds 1,000 lower. The charges on pension policies cover life office expenses and commission paid to sales staff.

The survey shows that the range of charges is vast. Equitable has the lowest, showing a reduction in yield of 1.4 per cent over 10 years and 0.8 per cent over 25.

Guardian, formerly GRE, has the highest with a reduction in yield of 6.3 per cent over 10 years and 2.5 per cent over 25 years.

When people are considering transferring from an occupational scheme, either money purchase or final salary, an adviser will look at the benefits the client will get by staying in an occupational scheme and try to see if a better return is possible on a personal pension.

Pension transfer analysis computer programs assume that life offices all have the same charges based on Lautro guidelines.

Pensions transfers are single premiums where the actual charges are much less than those shown in the survey. Many companies, however, will still have real charges that are much greater than the Lautro assumptions.

Eagle Star's charges would reduce the yield on a pension transfer by 1.2 per cent a year over 25 years and 1.7 per cent over 10, while Legal & General's would cut yields by 2.1 per cent over 10 years and 1.1 per cent over 25.

Lautro assumes a reduction in yield of 1.7 and 0.9 per cent over 10 and 25 years respectively.

John Jenkins, partner with the consulting actuaries Clay & Partners, which helped to compile the survey, says: 'The difference between standard charges and actual could make quite a significant difference over the longer term.'

The standard charges were set by Lautro six years ago. Since then life office charges have rocketed because of increases in commission and increased regulatory costs. Colin Hawtin, Lautro's head of policy, says: 'It is an unfortunate fact that the standard charges were embedded in the rules.'

From the beginning of next year all life companies will have to use actual charges.