Coming clean on pension costs

Charges made by life insurance companies on personal pensions can cost policyholders nearly a third of the total amount they pay in.

However, the range of charges is vast: the highest-charging offices can take 50 per cent more than the lowest. The expenses pay the company's marketing costs, and the adviser's or salesperson's salary or commission.

It is only since the beginning of this year that anyone will have been able to make valid comparison between company charges. Until then, members of the public were given only a limited idea of costs after they had decided to buy the policy.

Companies are expected to start slashing costs as competition takes effect. Many fear the new rules will mean that consumers put more emphasis on costs rather than investment performance.

High expenses do not necessarily mean that the product will not produce better-than-average returns. Scottish Widows, for example, looks quite expensive among the companies surveyed by the Independent, but it has produced some of the better returns for pension policyholders in past years.

David Graham, Scottish Widows marketing director, said costs were only part of the package people should consider when buying a policy. "Service is important and people have to be sure that their pensions office is going to be around in a few years." Policyholders would suffer if companies began to cut costs too much.

Allied Dunbar, has revamped its personal pension plan to coincide with the new regime, cutting expenses and the commission paid to its salesmen.

Ray Dean, Allied Dunbar senior consultant, said: "We have also tried to make the product more flexible, so the salesman will be able sell more to make up the drop in commission.''

Many other companies have also transformed their products and their commission structures in response to the new rules. Some will pay commission over the life of the policy rather than in a lump sum at the beginning of the contract.

Some of the cheaper-looking personal pensions contracts could be provided by the life insurance companies owned by the banks or building societies, such as NatWest Life, Black Horse Life and Britannia Life.

Their expenses may be less because they gain from economies of scale.