Cast your net far and wide

The Government's new pension scheme launched this week will allow you to trawl for better returns. But critics in the investment industry fear that Individual Pension Accounts (IPAs) may be full of holes.

The end of high charges and poor returns in the pensions industry could be nigh, after the Government announced this week a new way to save for retirement, which could leave you with a 30 per cent bigger pension pot.

The end of high charges and poor returns in the pensions industry could be nigh, after the Government announced this week a new way to save for retirement, which could leave you with a 30 per cent bigger pension pot.

Individual pension accounts (IPAs) promise to add to the reforming momentum created by stakeholder pensions when both launch next April. While stakeholders will drive down annual charges to 1 per cent, IPAs should liberate you from pensions currently offered by life companies with relatively high charges and little flexibility.

Last week The Independent suggested alternatives to orthodox pensions, pointing to Individual Savings Accounts (ISAs) - invested in unit trusts or investment trusts - as a viable alternative. IPAs will allow unit trust and investment trust providers to break into the huge UK pensions market. The fact that you can choose how your money is invested and carry your pensions "pot" between jobs, the Government says, could boost your pension by as much as a third.

With an IPA you will be able to invest all of your pension limit in unit trusts or investment trusts, rather than handing over your contributions to your pension company to invest in the funds of its choice. The performance of the latter are often opaque, as are the charges. IPAs, by contrast, will offer transparency, flexibility and portability. The intention is to give people a wide choice of where they put their money and the flexibility to move it around and change levels of contributions without incurring heavy charges.

But, some doubters in the investment industry have questioned whether IPAs will shake up the pensions status quo and queried whether they will benefit the very people the Government is targeting.

Melanie Johnson, economic secretary to the Treasury, said when launching IPAs this week: "The types of people who will be able to save as much as 30 per cent are those on modest incomes and who change job frequently or take breaks from their career, including working women who take time off to raise a family. The savings come from the charges that traditional pensions schemes would levy under those circumstances."

According to the Treasury, if you change jobs or take career breaks seven times or more during a career of 35 years, you could save 30 per cent. This is based on the premise that most people put moderate amounts into their pension and, due to charges, have less money in their pot in the first five years than they have put in.

IPAs are not a new pension and will not change any of the current rules but they will provide a "wrapper within a wrapper" - a way of bundling the investments within a pension scheme. They will be available through personal pensions and defined contribution company schemes (money purchase schemes). The government also hopes stakeholder providers will take them up. Those not included will be people with defined benefit company schemes.

Anyone with a provider who chooses not to offer an IPA wrapper would face the normal charges to switch schemes. People will have to decide whether they want all or some of their pension within an IPA wrapper, on top of questions about whether they want or are eligible for a stakeholder pension.This has led to concern in the industry that consumers will be left bewildered.

Nick Criticos, managing director of Royal & SunAlliance's investment arm, said: "Several major insurers have already expressed concern that the new scheme, although well intentioned, will merely add to the confusion suffered by most ordinary investors. A recent industry survey, for example, found that only around half of the population have even heard of stakeholder pensions at this point."

Daniel Godfrey, director general of the Association of Investment Trust Companies (AITC), is more positive: "It will not be over complicated. It will work like an ISA, with people going directly to a fund manager and taking out a personal pension. The difference is this pension will be invested via an IPA."

IPAs are based on America's successful 401k scheme that has boosted private investment for retirement. The UK investment companies reckon IPAs will change the pensions industry and Mr Godfrey is confident his fund-manager members will take up the IPA opportunity: "Some fund managers have already thought about setting up life companies in order to get into the pensions market. IPAs will mean that they do not have to have a life office."

IPAs on paper do represent a massive opportunity for new providers. While some unit trust companies do provide pensions, the system is cumbersome and expensive because the company has to reconcile pension rules, which do not allow people to access their money for 30 years, with unit trust rules, which allow daily access. IPAs will change this. People will not be able to plunder their pension pot, but they will be able to move money around free of charge as the government has abolished stamp duty reserve tax (SDRT) of 0.5 per cent, levied whenever you buy or sell units in a unit trust.

For the consumer, being able to invest much more directly in funds means a much wider choice of what you can invest in. Depending on how near to retirement you are and how happy you are to take a risk, you should be able to invest in anything from a FTSE 100 tracker product to a Chinese technology fund. But experts doubt this level of choice would be available within the 1 per cent charges of stakeholder. The extra choice also opens up the possibility of making the wrong choice.

Ms Johnson said IPAs will be widely available within stakeholder pensions and the 1 per cent charge "will not be a problem". But some major providers said while IPAs will probably be offered within stakeholder schemes, in reality a stakeholder scheme would mean less choice.

HSBC has just launched a stakeholder compliant scheme. Harpal Karlcut, head of pensions, said: "We have a team of people looking at how we could introduce IPAs. It could be within a stakeholder scheme. However, a more attractive market would be people who want to invest in more exotic funds. These would incur higher charges but the customer is likely to see a higher return."

People who are not as clued up about the money markets will be able to choose more restricted schemes, but there will be nothing to stop them betting on wild projections of future growth in some high risk funds. Rhoslyn Roberts, director of benefits at the National Association of Pension Funds (NAPF), said: "There will be a lot more choice of investments. This could make a big difference to how big your pension pot is - either up or down."

It may be difficult to receive guidance, as independent financial advisers (IFAs) may not feel any incentive to recommend the product. One insider said: "Charges will be tight, especially within stakeholders. What incentive will there be for independent advisers to research and advise on IPAs?"

If they do give advice, it may not be favourable. Jon Briggs, assistant director of Bath-based independent advisers Chartwell, said: "The IPA scheme is behind the times. Some life companies have driven their charges right down, while unit trusts can cost as much as 5.25 up front followed by a 1.25 to 1.5 per cent annual management fee."

The general view is established providers are not going to be wiped out, especially when the competition is unit trusts. Experts agree they have performed strongly compared to funds attached to life companies, but at significantly higher charges. Peter Hiscock, pensions product manager at Fleming, said: "Standard Life is not exactly going to be quaking in its boots. All of the major life companies have unit trust arms and they will not let business slip away."

That could be all for the good. It might not only boost competition in the pensions industry but also in the rest of financial services. One industry watcher said: "It could end up a bit like the stakeholder scheme at the beginning, when life assurance companies swore they could not deliver inside annual charges of 1 per cent.

"Unit trusts have said they cannot possibly bring their costs down, but we may find that magically they can. And then they may have to for all investors, not just people in IPAs, as parallel pricing on the same product clearly won't be acceptable."