Personal Finance: 2001 - a pensions odyssey

The Government is promising a good deal with stakeholder pensions. But should you wait?

Hundreds of thousands of people aiming to set money aside for their retirement over the next two or three years risk losing a substantial slice of their funds to heavy charges, despite the Government's forthcoming stakeholder pension system.

Personal pension providers are risking a new potential mis-selling scandal, amid accusations from some experts that they are pricing their products well above those of low-cost stakeholder schemes set to replace them in 2001.

Stakeholder schemes, the Government has promised, will be a better alternative than personal pensions for anyone earning up to pounds 18,500, at today's income levels. They will be cheap, probably charging no more than 1 per cent a year on funds under management, while setting up a policy will be equally cheap, or even free. This is important, as most personal pensions take away a substantial proportion of the first two years' contributions in setting-up costs, money which would otherwise deliver the highest compound returns because it is invested over the longest period of time.

The potential scandal comes as pension providers attempt to stave off a "funding limbo", as many would-be policyholders feel that it makes more sense to wait a couple of years and then join a stakeholder when it is set up.

But they are wrong. Waiting two years before starting contributions into a pension either risks the final pot being significantly underfunded, or having to make substantially higher contributions in order to catch up. According to some calculations, a 45-year-old man faces losing 22 per cent of his final fund at 65 if he delays making contributions by two years.

However, it is the actions of the pension providers themselves which have come under closest scrutiny. Instead of offering now to match whatever charges might be levelled when stakeholder schemes are finally introduced, they are promising only to effect a "free transfer" of their personal pensions into the new arrangement if it is beneficial.

In an attempt to clarify the position, the Government has outlawed the selling of any pension which would leave the customer "materially disadvantaged" when stakeholder schemes arrive.

Against this background, Moneyfacts, the financial analysts, this week published a report highlighting the scale of today's potential mis-selling crisis.

According to this, only one organisation, Legal & General, has produced a pension which will not in any way "materially disadvantage" customers. L&G is guaranteeing that the charges on any of its plans bought today will not be higher than those of a stakeholder. If, with hindsight, they have proved to be so, a customer's fund will be reimbursed.

Legal & General spokesman John Morgan says: "We are trying to spearhead a movement for competitive charges which offer a good deal to customers, and yet much of the rest of the industry wants to see the status quo protected for as long as possible."

Other companies have taken more limited steps to reassure the public. Clerical Medical, Norwich Union, Standard Life, Perpetual, Scottish Widows, and Scottish Equitable, for example, are among those which will allow customers to transfer penalty-free into a stakeholder. Winterthur Life looks set to offer something similar. However, given the Government's iron rule about "material disadvantage", they probably had little alternative.

Many of these companies have also pledged to keep costs keen, but none has given guarantees. These providers will now need to face up to some very difficult questions about whether they are "materially disadvantaging" customers.

If a policyholder injects a modest pounds 50 per month into a personal pension over the next two years this should be worth pounds 1,289 before any charges, if investments grow by 7 per cent annually.

If stakeholder charges of 1 per cent are levied, as they are likely to be on the L&G plan, then the pot will be worth pounds 1,275. According to Moneyfacts, however, many of the other best pension providers will produce a sum around pounds 200 less than this, simply as a result of extra charges.

This may not sound a huge amount of money, but it, of course, quadruples to a loss of pounds 800 on a still modest monthly premium of pounds 200. More significantly, however, it is the impact of compound interest over decades which takes the real hit.

A Moneyfacts spokesman explains: "Being even pounds 100 down in the early days of a pension can make a vast difference when it matures in 30 years' time. We are talking about losing thousands of pounds, which must constitute a material difference."

Aware of the potential fallout from any retrospective assessement of today's pension sales, the Association of British Insurers (ABI) is also attempting to devise a set of guidelines, as much to protect companies as consumers.

However, fears are emerging that these guidelines may do little but reinforce current bad practice from the consumers' point of view. ABI meetings are believed to have discussed setting minimum charges at 15 per cent or below, and outlawing those above 30 per cent. These figures are way out of line with the 2 or 3 per cent maximum which a stakeholder would deduct over two years.

However Standard Life's general manager, business development, Alan Maxwell, says it is too early to draw conclusions. "We don't know for sure what stakeholder charges are going to be, whether they will be a percentage of the fund or a flat fee. We don't know if an additional fee will be levied for advice. There have also been suggestions of a less stringent regulatory regime which could bring the cost down.

"With all this in mind we believe it is appropriate to continue charging on our current basis."

The ABI is eager to stress that no figures have yet been set for its guidlines and discussions are continuing.

For thousands of people who are considering starting a pension, the lesson to be learnt is that they should not put off making a decision. It is worthwhile planning for retirement now - even starting a personal pension - but only if it offers good value.