Pensions: Counting the cost of charges

INVESTMENT performance and charges are the two factors that determine how much your personal pension will be worth. There may be other factors to consider when buying personal pensions - flexibility, for example - but it is performance and charges that make the difference.

Trouble is, investment performance isn't something you can check before you start your plan. Looking at past performance will tell you which companies have done well, but there's no sure-fire way to know which will star in the future.

Charges are another matter. It is vital that you do study charges. Costs vary enormously among the 80 or so plans on the market, and the industry has a reputation for expensive, confusing fee scales.

Fortunately, this is beginning to improve. Three years ago the Personal Investment Authority, the regulator that polices most pension providers, introduced rules on how charges should be explained. It is now much easier to see what pension providers do charge - and that is supposed to have persuaded providers to lower their fees. However, progress has been slow.

The costs that almost all personal pension providers take out of your contributions are the initial and annual management charges. The annual management fee - the charge for investing your money - is more straightforward. It is usually a percentage fee, typically 1 to 2 per cent of your fund, which is deducted every year. In addition, some companies charge an annual policy fee. This is a lump sum - pounds 50, say - to cover administration expenses. Initial charges are levied in different ways. Most common is the bid-offer spread. This is the difference between the price at which you buy units in a personal pension fund and the price at which you can cash them. Bid- offer spreads can be as high as 5 to 6 per cent.

Initial charges are also often quoted in terms of allocation rates, or the amount of your contribution that is invested in your fund. A 95 per cent allocation rate, for instance, means an initial charge of 5 per cent is being deducted from your contribution. Note also that some pension providers levy an initial administration charge, a one-off fee for setting up your policy.

However, costs can really rise if you decide to suspend or change the amount you contribute to your pension plan. Look out for penalty fees in these areas.

Exit or surrender fees are also important. These are deducted from a fund if you decide to switch to another provider.

All these charges should be explained to you before you start a pension. But if you choose a with-profits pension that earns annual bonuses at the discretion of the fund manager, rather than a unit-linked plan, many charges will be deducted from the annual bonuses, making them even harder to spot.

But don't despair. There are now a good many simple and cheap personal pensions available over the telephone. Virgin, for example, charges a 1 per cent annual management fee and a 2 per policy administration fee. Eagle Star has almost identical fees for its personal pension.

Other companies that sell relatively cheap personal pensions direct include Colonial, Legal & General, Marks & Spencer, Merchant Investors, PensionStore, Save & Prosper and Scottish Widows.

And even among the non-direct providers, several companies have a good reputation for low charges. Try Equitable Life, Govett, NFU Mutual and Norwich Union for starters.

q Contacts: Colonial, 01634 890000; Eagle Star, 01242 258556; Equitable Life, 0171-606 6611; Govett, 0171-378 7979; Legal & General: 0171-528 6618; Marks & Spencer, 0800 363432; Money Management, 0171-896 2525; NFU Mutual, 01789 204211; Norwich Union, 01603 622200; PensionStore, 0171-222 4290; Save & Prosper, 0171-417 2200; Scottish Widows, 0131 655 6000; Virgin, 0345 900900.

David Prosser is features editor of 'Investors Chronicle'.