Pensions: You can cut out the fees, but not the homework

GO DIRECT and get the cheapest pension on the market, shout the telephone pension providers, who say they can keep their charges down as they do not have to pay middlemen.

But are the direct pension providers as good value as they claim? Opponents of the telephone pension companies say that the debate between going direct or going to an independent financial adviser (IFA) centres on performance.

Peter Jordan, pension brand manager of Skandia Life Group, says: "Look for a good fund manager. You may pay higher charges but these may be insignificant if your fund does well."

Many direct providers invest your money in tracker funds that are passively managed; that is, they follow the average performance of the stock market. An IFA will often recommend an actively managed fund, which employs expensive managers to select investments. For example, Virgin Direct invests in the FT-SE All Share Index that tracks 900 UK companies, while Direct Line tracks the FT-SE 100.

But Rowan Gormley, managing director of Virgin Direct, points out that the All Share Index achieved growth of 23.5 per cent last year against 16.8 per cent for actively-managed funds. The Office of Fair Trading also commented favourably on tracker funds because less dealing is involved and charges are lower.

Remember, though, that we are in a bull market and this could easily change to a bear market with managed funds out-performing tracker funds. It has also to be noted that 85 per cent of pension funds are in managed funds, which plough their money into different types of investment, largely equities.

John Charcol, a leading firm of IFAs, says good advice was necessary to ensure that clients took out the most suitable products. Robert Guy, technical director, says: "People have no idea about how to structure their pension in terms of their lifestyle and how much to pay. Pensions do not work in isolation - there is life assurance, income protection and waiver of premium to consider. The value of good advice is immeasurable."

Many of the direct providers sell pensions on an execution-only basis without financial advice. Some do provide it if requested, or if they feel it is advisable. Direct Line, Colonial, GA Life and Virgin Direct all offer financial advice. However, Direct Line and Virgin Direct said that their customers tend to be financially confident and are happy to invest in a direct provider without any advice.

Eagle Star pointed out that if you do not take advice then, in the event of a complaint, you would be unable to seek compensation. Half of Eagle Star's direct pension customers ask for advice and it recommends that anyone going direct should do the same. Abbey National Direct sells its pensions by phone with advice, but commented that if you are only putting pounds 50 a month into a pension it is not worth paying for advice.

Nobody can predict future performance and whether you choose to take out a direct pension or go to an IFA, spending time to take advice will not do you any harm.

Before you begin a pension plan, do not be afraid to ask as many questions as you can. First decide whether you feel confident enough to buy a pension on the phone on an execution-only basis, or whether you need advice on the phone or face-to-face. If you decide to go to a financial adviser, ask whether it is an IFA or a tied agent which only sells one firm's products.

Think about your lifestyle - do you need flexibility? Do you understand the charges? Can contributions from your employer be included? Should you contract out of the state earnings-related pension scheme? Is there a waiver of premium in case of illness? Are investment options available? Finally, the golden rule - do not sign anything you do not understand.

q Karen Murray is editor of 'Retail Finance Direct'.