Policies with a sting

If you miss payment on a pension plan through unemployment or switching to an employer's scheme, beware, writes Andrew Verity, because expensive traps lie in fine print even experts struggle to translate

Leading personal pension providers are loading extra charges on policyholders who cannot keep up payments on their savings plans, in order to fund the large up-front commissions they pay to financial advisers. Even pensions experts confess they do not fully understand the extra charges, which are buried in the complicated fine print of contracts their clients are being asked to sign.

The extra charges levied by some companies, including Scottish Equitable and Skandia Life, do not show up in the headline figures designed by the Personal Investment Authority, the financial regulator, to help consumers. Policyholders who start personal pensions with these providers, in the belief that their products are among the most competitive, risk paying thousands of pounds in extra fees.

Details of the new charges follow a new investigation into personal pensions by the Office of Fair Trading. They appear in the specialist financial newspaper Money Marketing.

The extra fees levied by Scottish Equitable, which takes more than pounds 30m a month in pensions premiums, are called the "specific member charge", where contributions are halted or reduced during the lifetime of a policy. Yet Scottish Equitable admits that because of unemployment, divorce and the offer of company pension schemes, 8 per cent of its policyholders stop their payments every year. Hundreds more reduce the amount they pay in. This means that after 10 years, most of the company's holders of monthly premium pensions are likely to have stopped contributing - and will therefore pay higher charges even when no money is going in.

Even more strangely, Scottish Equitable also raises the percentage it takes out of a contract when policyholders raise contributions, which they are constantly being exhorted to do in order to ensure a decent retirement income.

Skandia Life also raises charges for policyholders who reduce or stop their payments by means of a "contribution servicing charge". A policyholder who pays pounds 50 a month into a 25-year policy with Skandia and misses the third year's payments will pay an extra pounds 68 as a penalty for missing contributions.

With the pounds 2.45 a month that is charged just for having the pension scheme, this adds up to a charge of pounds 97 for a pension plan into which no money is going in. Skandia will not repay the charge - even if the policyholder resumes payment and repays all the necessary contributions.

The charges cast doubt on the validity of key reforms introduced by the PIA, supposedly to help consumers measure the cost of a personal pension contract. But the key figures that show the cost of the contract and the fund at retirement apply only if payments are kept up at the same level all the way to retirement - often 25 years away.

According to the actuarial consultancy AKG, less than 35 per cent of premiums to personal pensions are still being paid after 10 years. Most last no longer than six years.

The AKG actuary, Nick Anderton, says that in two-thirds of cases where policyholders stop paying, it is because of circumstances outside their control such as unemployment.

As well as the chance of losing their jobs, the PIA's key figures do not reflect the cost in charges to holders of personal pensions if they stop paying because they are offered an employer's scheme. Nick Bamford, managing director of the pension specialists Informed Choice, says: "I inherited a client with a regular ScotEq personal pension and we tried to work out how much he'd pay if he had a career break. We asked for a table to help work it out, but ScotEq wouldn't give us that. I read the charging structure in the technical specification 12 times before I had even a vague idea of how it worked."

Skandia Life often appears at the top of league tables designed to help advisers to decide who gives the best value. The company's pensions marketing manager, Peter Jordan, admits that few are likely to maintain level contributions throughout the contract. "There are a lot of weaknesses in PIA's illustration basis," he says. "We don't have the luxury of high charges at the start of the contract, so we make use of this to cover our costs. But there are very few who pay commission up-front who do not impose penalties" n