The age of the low-cost pension

The charges look favourable but performance depends on the stock market, says Clifford German

The shape of the perfect personal pension plan is slowly emerging from the shrouded secrecy that has allowed pension-providers to make big profits at the expense of trusting customers who thought all their contributions were being invested in their actual fund.

It is emerging too late for several million existing plan-holders who are already locked in to plans which, because of high initial charges, will not start performing properly for several years after they are started. But it could still be faster than the new generation of pensions promised by the Conservative and Labour parties.

The latest plan to hit the streets comes this week from Legal & General. They claim their new pension plan, which will be sold over the telephone, will be the leading product on the market in terms of charges, provided purchasers stick with the plan for at least 5-6 years. This means it will eventually be the cheapest in terms of charges.

Whether it will also be the best in the long run will depend entirely on the performance of the FTSE 100 index of leading UK shares, because the funds will be invested in L&G's existing tracker fund that moves up and down exactly in line with the index.

It does not eliminate the risk of sharp falls in the index itself, however, and L&G is already working on an alternative "safety fund" into which pension cash can be invested to reduce the volatility of the performance, especially for investors approaching retirement date.

The plan structure allows investors to identify all the potential pitfalls implicit in personal pension plans. The minimum investment is pounds 50 a month or a single payment of pounds 2,000. The plan charges a flat fee of pounds 1.50 a month for administration, plus an annual management fee at 0.5 per cent of the current value of the funds. Both these fees are deducted from the value of the fund.

Before the contributions are actually invested, however, a 5 per cent charge is levied, reflecting the standard bid-to-offer spread of prices at which units in the fund itself are bought and sold. This charge is partly offset by the allocation rate of 102.2 per cent of the money the investor subscribes. The combined effect is that pounds 97 in every pounds 100 contributed actually finds its way into the fund.

Comparable pension plans from the likes of Virgin, Eagle Star and Flemings have no bid-offer spread, which is why their total charges are lower in the first few years, but they have higher management charges, which eventually overhaul the L&G charges.

L&G Direct does not automatically offer advice to investors but, as with the similar product launched earlier this year by Eagle Star, it will refund all charges if investors decide within the first two years that they are not satisfied.

It also scores well on flexibility. Investors can stop contributions if they lose their jobs, or if they have the opportunity to join a company scheme which the employer will contribute to, and restart contributions when they resume work or leave the jobs that have a company scheme.

While the contributions are in abeyance, investors will be charged only the monthly administration fee and the annual management charge.

Investors who stop contributing because they are unable to work through incapacity will be entitled to a waiver of premiums, which means their contributions will continue to be added without charge until they are able to return to their chosen profession - unlike some pension plans which offer similar waivers of premiums but stop if investors are passed fit to do any kind of job, not necessarily in their chosen field.

This particular product is tailored for people who do not currently have access to a company scheme or a personal pension. Buyers cannot transfer in from another scheme or contract out of Serps, which removes the main risks of mis-selling. The pension is being sold by direct offer, which means it does not come with specific advice as to whether it is suitable for the needs of particular individuals, but applicants do receive an information pack which should answer all the queries of a sophisticated investor. Anyone who then wants advice is recommended to consult their own financial adviser, referred to a tied L&G salesman, or given a list of independent advisers who will pronounce on the suitability of the product - for a fee of coursen