Personal Finance: Eliminate rogue figures from the pension hunt

In theory, charges on life and pension products can be checked exactly. But even the experts can still be confused. Janet Walford has a cautionary tale

For the last three years, following a change in the regulations, it has been possible for consumers to check exactly what insurance companies are charging for their life and pensions products.

That's the theory at least, but it is no easy task for the layman. In fact, even the experts are sometimes hoodwinked by the less venerable practices of some insurance companies.

Money Management magazine, which carries in-depth surveys of complex financial products, aims to make comparisons of charges and performance an easy task. In compiling tables on charges and performance, it relies to a large extent on the veracity of the participants.

The magazine is used to spotting rogue figures that crop up now and then. But its best endeavours can be made useless when faced with cynical manipulation of its surveys by some companies, which choose to ignore instructions about what should be taken into account when compiling figures for the surveys.

For example, a recent Money Management survey compared the cost of flexibility on personal pensions. Its purpose was to show what happened when someone took out a 25-year personal pension, in all good faith, but finds that his circumstances subsequently change unexpectedly, forcing him to revise his original intentions - which is exactly what happens to many people in real life.

In the survey, companies were asked for figures showing what would happen to this 25-year personal pension where contributions of pounds 100 per month were stopped after two years and the pounds 2,400 paid in was left invested until the original maturity date.

Allied Dunbar, a life insurance company, provided a figure of pounds 13,588, which placed it firmly in the top quarter of the 45 participants. The magazine carefully checked this figure before it went to print, as Allied Dunbar is not known to be particularly competitive in this sort of scenario. But repeated assurances were given that the figure was indeed correct.

It transpired, however, that Allied Dunbar had not followed the instructions in the questionnaire when it compiled the figure. Instead of basing its figure on a 25-year plan that was stopped unexpectedly after two years, it assumed that the client knew at the outset that he would only want the plan for two years, and based its figure on a short-term plan which had much lower charges.

In actual fact the correct figure should have been zero - the charges for starting up and running the plan were so high that, even at a growth rate of 9 per cent per annum over 25 years, the pounds 2,400-worth of contributions paid in were totally exhausted. The correct figure would have put Allied Dunbar firmly at the bottom of the table of 45 companies.

This just goes to show how difficult it can be to make comparisons between products. If you are thinking of buying a personal pension, you should always get quotes from two or three companies to allow you to make a comparison (or, better still, get an independent adviser to do it for you).

Provided you ask for a quotation for exactly the same thing, you should get figures that allow you to compare charges on an equal basis. The effect of charges is shown in the "key features" document which every company must send you when you buy, for example, a personal pension.

But when insurance companies take part in published surveys they are aware that their figures will be compared with many other product providers, not just two or three, and that the results will be read not only by professional advisers and consumers but by the national press and the regulators too. So appearing well in them can mean a lot.

Sometimes the wording in questionnaires sent to product providers by various enquirers leaves a lot to be desired and the insurance companies have to spend a lot of time trying to interpret what is required. This survey, however, was tightly worded and certainly left no doubt in the minds of the other 44 participants.

The worrying point of this whole sorry saga is that if policies were less complex in the first place people would not need to be constantly on their guard against getting wrong or misleading information. Nowadays, all pension plans claim to be flexible - but too many of them only allow flexibility at huge cost.

All too often this is not made clear by the company's sales representative at the outset. In most cases, policies sold by the direct salesforce of an insurance company cost more than those brought through an independent adviser or direct by telephone.

Allied Dunbar, like many other insurance companies, sells its products mainly though its own 4,000-strong salesforce. Such salespeople can only tell you about their own products and will obviously want to show them in the best possible light to persuade you to buy.

The moral of this story is clear - if you are considering buying a personal pension plan, and you think that your circumstances may change in the future, you need to ask the salesman more than just whether the plan is flexible. The answer to that simple question will most likely be yes. What you also need to ask is: "What is the cost of this flexibility?" Forgetting to ask that question could end of costing you dear - over pounds 13,000 in the case of Allied Dunbar.

Janet Walford is editor of 'Money Management' magazine