Under the Spotlight/the tesco pension: Can Tesco's pensions match up to its veg?

Andrew Verity checks out if the supermarket chain can offer savers that little bit more

Tesco became this week the latest in a long list of retailers urging its customers to save for a pension at its stores. Like Virgin or Marks & Spencer, it is selling a pension direct to its customers: no sales person, no commission - and no independent advice.

So far, Tesco has led the rest of the retail industry in personal finance. Its savings account prompted a copycat at Sainsbury; other supermarkets have imitated its loyalty card scheme; it offers home insurance, loans and a visa card.

But does the pension fit the new Tesco ethos of quality and value for money? Or is it closer to the philosophy of Tesco's founder, Jack Cohen, who famously urged his managers to pile 'em high and sell 'em cheap?

The product: The Tesco Pension, from Tesco Personal Finance Life (currently being tested in 20 stores).

The deal: Save at least pounds 1 a day, or pounds 30 a month, with Tesco. The savings carry the usual tax benefits. A basic-rate taxpayer would see pounds 100 go into the pension for every pounds 77 saved. Some of the interest on the fund is also tax-free. Payouts are taxed - though up to 25 per cent of a fund can be paid out as a tax-free lump sum. Benefits can be drawn from the age of 50.

A Tesco investor can pick from five funds run by Tesco's partner in personal finance, Scottish Widows. The UK Growth fund mimics the performance of the FT AllShare Index. The Balanced Growth Fund mimics the investments of other balanced growth funds: it invests roughly 70 per cent in UK shares and the rest in gilts and overseas stocks. The International Growth Fund tracks the overseas investments of the average pension fund manager. The Fixed Interest Fund follows the performance of fixed-interest stocks such as government bonds. The Cash Fund invests in short-term securities - such as Treasury bills.

Plus points: The charges look low and the product is simple. Unlike its rival pension at Marks & Spencer, there is no monthly plan fee. The minimum saving of pounds 30 a month is lower than rivals such as Eagle Star, Virgin or even Legal & General's direct pension.

All Tesco charges is a 4 per cent payment upfront and an ongoing annual fee of 1 per cent of the fund.

Tesco has eliminated penalties for savers who are forced to stop contributing in the early years. This is a blessing in comparison to most personal pensions, where savers get poor value if they stop early. That creates a particularly nasty dilemma if a policyholder is offered a good employer's scheme: policyholders are damned if they do and damned if they don't. But there are many other products that are also penalty-free.

The choice of investments is in stark contrast to rivals such as Virgin: Mr Branson only offers a tracker or a corporate bond fund.

Drawbacks and risks: You can get a cheaper product at an upmarket rival. Flemings, the asset manager and investment bank, also offers a pension with no monthly plan fee and no penalties. But its annual fee is half of Tesco's - 0.5 per cent of the fund.

One per cent may not sound much. But a saver who put pounds 100 a month in the plan over 25 years (assuming interest of 9 per cent a year) would in the end be paying more than pounds 850 a year through this 1 per cent. With Flemings the fee would be half as much.

This matters little if Scottish Widows can produce amazing investment performance for Tesco savers. But while it has a reasonable investment record, savers cannot know it will surpass its rivals over such a long period of time.

Verdict: Like Tesco fruit & veg, it's good but not the best, cheap but not the cheapest.

Marks out of five: Three.