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Picking the wrong pension can prove expensive


The cost of taking out a personal pension or endowment policy varies enormously from one company to another. Financial advisers have long known this - but it has taken the enforced disclosure of charges and commissions from 1 January this year to bring the sometimes huge disparity into the open.

According to an authoritative new survey this week, investors who place their money with some of Britain's best-known personal pension providers will see tens of thousands of pounds taken from the value of their policies on maturity because of company charges.

The cost of choosing between the cheapest and most expensive fund can be more than 20 per cent, leading to a difference of up to £20,000 on a £100 a month pension after 25 years. The report, by Money Marketing, underlines the importance of analysing the commissions and charges levied by different pension providers.

Among the most expensive, says the report, are many household names, including Prudential, Commercial Union, Scottish Provident and Standard Life. Firms with low costs include several that pay no commission to financial advisers, such as Equitable Life, Provident Life and Professional Life.

The difference between low and high commission-paying companies is not always huge. Of those that do pay commission, Scottish Amicable, Legal & General and Axa Equity & Law have some of the lowest charges.

The survey is the first to focus on company costs since new disclosure rules were imposed by the Treasury on 1 January. Its findings show returns for both unit-linked policies, which are closely linked to the stock market, and with-profits plans where companies use past returns to smooth out fund performance over a number of years.

The figures are calculated by assuming a fixed growth rate of 9 per cent a year in the case of pensions and 7.5 per cent net of tax for endowments.

On with-profits endowments, the survey places Scottish Amicable in the top three, with total charges of £8,415 on premiums of £100 a month over 25 years, delivering £70,500. This compares with a maximum of £84,851 if no charges were levied at all. Other low-charging companies include Equitable Life, Scottish Provident and Friends Provident.

Among the more expensive firms is Guardian, formerly Guardian Royal Exchange. Savers would see more than £20,000 cut off the maturity value of their endowments with the firm, delivering returns of £58,656. Royal Life, paying £61,624 and Clerical Medical, on £61,800, were also in the bottom three for charges.

The survey reveals that despite attempts by financial regulators to make charges easier to understand, companies themselves are having none of it.

A proliferation of different charging structures is used by various firms, making it extremely difficult to compare them on a like-for-like basis.

Alistair McArthur, who edited the survey, said: "So far, disclosure has not had the desired effect. Providers have complied with the letter rather than the spirit of the rulings.

"They are doing the minimum required rather than taking enough steps to make products transparent. Once again, some life insurance companies appear to be dragging their heels.

"Disclosure of charges and allocation rates should be welcomed but product providers still have a long way to go before investors can be sure just how much their plans will cost."

Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, said: "The most important point is that while the effect of charges is one part of the calculations made when deciding whether to invest money with a company, the other crucial area to consider is performance."

The survey normally costs £3.75. It is available by special offer to Independent readers for £2.75 (plus 25p P&P). Send cheques or POs, made out to Money Marketing, to: Ian Paxton, St Giles House, 50 Poland Street London, W1V 4AX.