Personal finance: A Direct Line to cheaper pension provision?

Direct Line, the bargain basement insurer, this week presented itself as the new saviour of the nation's retirement incomes as it launched a no-nonsense pension. Such is its clout that it was immediately attacked by the other pretender to that role, Virgin Direct. Andrew Verity reports.

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.

Start your day with The Independent, sign up for daily news emails
Suggested Topics
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Yorkshire Building Society is a leading player in offsets

Offset mortgages: How to save thousands of pounds and reduce the term of your home loan

Offset mortgages make even more sense when savings rates are at rock bottom

A physiotherapist helps a patient – a service one ex-employee was denied after paying for it

Questions of Cash: I've been chased for a phantom debt. What can I do to stop it haunting my credit status?

An Independent reader received a letter stating that a debt with O2 had been sold to a firm called Lowell Financial for collection

My Travel Cash card charges a punitive 'inactivity' fee of €2.50 a month

Simon Read stored the card away for 24 months, which cost him €60

Renting from a rogue landlord? It’s time to know your rights

Some 125,000 tenants have been victims of abusive landlords in the past year

This year's models: buyers have plenty of options as they try to get the money together to drive away from the dealer in a new car

Car finance options: Best way to buy a 65 plate

Sales could find another gear as the '65' registration hits the forecourts next week. Rob Griffin looks at the finance options
In too deep? Travel cover is among the benefits offered by packaged bank accounts

Claims firms blamed as complaints soar over packaged bank accounts

Many customers complained they were switched to the accounts without their knowledge

Finger on the interest rate trigger: the Bank of England

The best deals on personal loans: Peer-to-peer providers are more competitive for smaller sums

Meanwhile, high-street lenders continue to cherry-pick and be more competitive on larger loans

China stock collapse: Five things you need to know about 'Black Monday'

The market plummeted this week, losing all the gains made for the year

Which? warns sports fans about Rugby World Cup ticket scams

GetSporting.com offers deals that may be too good to be true

Could it be the time to focus on Japan? Some believe the country has no choice but to boost consumption and the economy will get back on track

Investors told to travel the world in the search for higher returns

Assets have risen in value across the board and volatility isn't going away. Rob Griffin asks where we should put our cash
As rising house prices push up demand for renting, so tenants are having to dig deeper than ever

Starter home initiative is urgently needed as rents go through the roof

Rents in England and Wales rose by 1.9 per cent in July to an average of £804

Peer-to-peer lending rates put Nisas to shame

The returns from P2P providers look more attractive than ever

Questions of Cash: Log-in problems turned eDreams booking into one-way ticket to nowhere

The company failed to provide our reader's flight ticket - or a refund

Hot property: business has been booming in estate agents this month, even though it’s the height of the summer holiday season

Heat rises for mortgage deals as UK homeowners sense a rate hike coming

The housing market should go quiet in August but instead people have been acting like cheap loans won't last. Do we really have to rush, asks Simon Read
Phones have now overtaken personal computers as the most used way of accessing the internet

Who you gonna call? The Complaints Busters

Unhappy customers have been given their own Ombudsman to help fight for them.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea