Personal finance: A Direct Line to cheaper pension provision?
Saturday 24 January 1998
It very nearly goes without saying: none of us saves enough to be comfortable in retirement. Nevertheless, Direct Line, the downmarket direct insurer, has commissioned a survey to tell us why. The sobering facts are worth repeating.
According to the Mori survey of more than 1,000 adults, over half of us are honest enough to admit we have no idea how much money is in our pension fund. On average, we reckon we will get a pension income of pounds 852 a month. In fact, if things stay as they are, we will get an average of just pounds 200, perilously close to the poverty line.
Direct Line's life insurance wing accuses the bewildered British public of being in a state of "guilty inertia", knowing what is needed but constantly procrastinating because of other financial pressures. The company's chief executive, Duncan MacKechnie, says: "There is a real need to bridge the gap between people's expectations for their retirement and the pessimism which currently exists about the state of current pension provision."
The state of pension saving is dire, says the survey, and we're all a bit ignorant about it. But should we follow the next conclusion, that Direct Line can provide the solution?
The company is famous for its shake-up of motor insurance. Because motor insurance is compulsory, costs can be cut by eliminating the "middle-man", the insurance broker, and appealing straight to the public through friendly TV ads. In the early 1990s, the company was able to undercut other insurers to such an extent that the whole market was forced to follow. Few companies now take a big profit from motor insurance.
Direct Line evidently believes the same can be done to the pensions market. The Government wants low-cost, private schemes for everyone. Personal pensions have, it says, been much too expensive, with charges eating up as much as a third of contributions. This is because the provider has to cover commissions to the sales people in the middle who sell them (which have risen by up to 60 per cent in the past five years).
Direct Line believes it can overcome our inertia by bringing out a straightforward, no-nonsense pension. By appealing directly to consumers, it does not have to pay commission. So its products will be cheaper.
The rhetoric has a familiar ring: very similar to that of Tesco's, Virgin, Legal & General, Marks & Spencer, Eagle Star and Scottish Widows, who have all launched "direct" pensions in the last two years. Is Direct Line doing anything new?
At first it looks very cheap. Direct Line's new customers get charged 1 per cent of their fund per year. They can invest in a fund that tracks the FTSE 100 - or just put their money on deposit. Payments can be by cheque or direct debit. Easy.
Well, not quite. Sensing heavyweight competition, rivals such as Virgin and Legal & General have rushed out statements insisting their pensions are cheaper. Virgin seizes on an extra fee. Only 98 per cent of every pound at First Direct will, in effect, be invested (a common practice known as "reduced allocation"). Virgin's pounds 2 a month is easier to understand. Not only that, says Virgin. "Direct Line's limits are restrictive. You have to invest at least pounds 75 a month. With Virgin, invest what you like, when you like as long as it's pounds 50 or more," a statement from Virgin said.
Are Virgin being, as the slogan says, Virgin Direct? Well, not quite. If pounds 50 was invested with Virgin, its charges would be pounds 2 plus a 1 per cent fund management charge - or 5 per cent of your investment. Considering Virgin says it is appealing to people with all levels of income, this is not all that cheap.
Because it charges by percentage, Direct Line's pension is cheaper for smaller contributions. At pounds 75 a month, its charges amount to 3 per cent. Virgin's are a fifth higher, at 3.7 per cent.
The bickering over cheaper pensions also masks a more important debate. Virgin and Direct Line are cheap partly because they offer a cheap way of investing their customers' pension savings. Just stick it in a fund which tracks the FTSE 100 index, they say. Over the long term, active fund managers never do as well as the index - and they are more expensive, so the charge is bigger.
Unfortunately, some of these arguments may be wearing thin. Customers have validly protested in the past that a 1.5 per cent charge on their savings, much of which goes to the extravagant salaries paid to fund managers, is not value for money. Between October 1995 and September 1997, less than one third of UK unit trusts got more from their investments than a fund tracking the FTSE 100. But in the last quarter of last year, nearly half did just as well, according to figures from HSBC Asset Management.
According to received wisdom, active fund managers will do better than tracker funds in a bear market. And over the long term, investment performance can have a much greater effect on the size of a pension fund than charges will. Cheaper, in other words, may not always mean better.
`The Independent' has published a free 26-page guide to pension planning, written by Nic Cicutti, personal finance editor. The guide, sponsored by Eagle Star, discusses what kind of pension you may need, and how to find it. It is available by calling 0800 776666. Or fill in the coupon on page 6.
25 October 2014 12:38 AM
'A third extra for free', gift sets, recommendations for a present for Grandpa - just some ways to make you pay more than you intended
17 October 2014 07:45 PM
The ethical investment industry is giving itself a makeover, but the problem seems to lie more with getting its message and its methods into the mainstream
17 October 2014 07:08 PM
Going down the wrong road: parking fines are nudging people into debt difficulties
17 October 2014 07:58 PM
Stacks of income: Drax is among the companies in Neil Woodford’s portfolio that he believes will pay strong dividends
17 October 2014 07:23 PM
Don't panic, it’s a wise idea to check investments regularly to ensure they are on target for your hoped-for returns
17 October 2014 08:18 PM
With little or no wage growth being seen in the UK, increasing house-price inflation could see the number of first-time buyers slide further, unless there’s a new accelerated house building programme
17 October 2014 07:19 PM
You should ignore the headline offers and trickery and work out the total cost of borrowing under different deals
17 October 2014 07:24 PM
Denise Leigh, who appeared in a production of Rigoletto with Alan Opie, was left without an essential service
10 October 2014 06:13 PM
A charity has calculated the cost to us all of unmanageable debt – from lost productivity to the extra demands on the NHS
10 October 2014 06:36 PM
The regulators are at last tackling the high-profile payday lenders, but they appear to be ignoring the growing problem of internet loan firms
10 October 2014 06:35 PM
As the cold weather hits, the question of soaring bills will be felt by each of us at home
- 1 This 'woman calls police to order pizza' story isn't going where you're expecting
- 2 Axe wielding man shot dead after attacking four New York policemen on busy street
- 3 Watch what happened when food critics were unknowingly served McDonald's
- 4 Jimmy Carr's Oscar Pistorius joke goes a bit too far at the Q Awards
- 5 Ottawa shootings: Bruce MacKinnon's cartoon is the perfect tribute to soldier Nathan Cirillo
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Attacks on 'Ukip Calypso' show how skewed people’s priorities are
Poppy Appeal 2014: This is why I won't be wearing a red poppy this year
iJobs Money & Business
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village