Your Money: A stake through the heart

WHAT DO the UK's 20 million personal pension policyholders and Joan Collins have in common? Would it be too unkind to describe them both as a testimony to menopausal chic, for whom the operation has arrived too late? Maybe, in Joan's case.

Britain is headed for a pensions revolution which should help to solve our retirement crisis. The Government has announced a generous package of taxbreaks to encourage people to pay for their own old age. And not just for people with an income. Mature students, mothers and carers can for the first time pay into a pension and see the savings boosted by the taxman, even though they have no earnings of their own. These policies are also cheap. The Government stood firm against industry protests and pared charges to the bone.

And they are simple and flexible. You can switch between companies without early surrender or penalty charges. Stakeholder is a dream, the first mass market financial product designed with customers' best interests at heart. But then it was not designed by the insurance industry, unlike existing personal pensions.

However, fears mounted this week that one group left out in the cold could be prudent savers, who have already begun an old-style personal plan. As about 80 per cent will be more expensive than a Stakeholder, they could comprise tomorrow's pensions poor.

They must take act urgently to avert a catastrophe on retirement, by deciding whether to switch to a new low-charge plan. That decision is far from easy and in some cases impossible. To calculate whether to switch you need to perform complex mathematical equations which even actuaries, the industry's rocket scientists, have not yet got their heads around. In many cases, the necessary information is not made freely available. So even if you are Carol Vorderman, you still won't get an answer.

Finally, where the results show high charges for decades to come, maybe little can be done. Many investors will remain trapped by onerous redemption penalties. Companies have a vested interest in maintaining the veil of secrecy. They take up to three per cent a year from their pensions pools to cover expenses, while the Government insisted on a one per cent annual management charge. With pounds 225 billion in their existing personal pensions pots, they lose pounds 2 billion a year each time their margins are squeezed by one per cent.

Conor Hoey, a Stakeholder specialist at independent actuaries Bacon & Woodrow, says: "Charges on most policies are highly complex and almost impossible to understand. Yet customers must somehow convert these into a Stakeholder-type annual fee, to see whether they are paying more and should consider switching."

Worst hit are those with with-profits contracts, because these do not disclose their annual management expenses, which are deducted before the annual bonus declaration. Customers therefore have no idea whether they are being charged more or less than they would be with a Stakeholder.

John Turton, head of Life & Pensions at independent advisers Best Investment, says: "In our view with-profits customers could lose out in three ways. First, they don't know what their annual charge is, secondly the bonuses are completely at the companies' discretion and finally if they attempt to switch elsewhere they could lose a large slice of the underlying value." The Government's actuarial department this week confirmed that the Treasury was aware of the problems associated with with-profits contracts. Chief consumer watchdog, the Office of Fair Trading, will watch how transitional arrangements might develop.

An OFT spokesman said: "We are bound to look at any financial products which may be detrimental to consumers. It is our job to see that disclosure operates fully and effectively."

To throw some light on the problem, The Independent took a random Scottish Equitable policy which has been in force for about a dozen years and calculated what the annual charges would be in the nearly 20 years left to retirement. As ScotEq frequently appears in best performance tables, there is no reason to think the results reflect anything other than the norm.

Our sums showed that despite the heavy set-up costs in the early days, the company would continue charging this customer 2.4 per cent annually for management if it stuck with its existing contract, way above the Government's Stakeholder maximum of one per cent.

Furthermore, if the customer switched he would be hammered by a huge redemption penalty equating to 0.7 per cent over the contract's remaining life. In other words, it might make sense for this customer to move to another company, but if he does he will continue to pay nearly twice what the Government promised for his pension for the next two decades. This would make a huge difference to the ultimate size of his nest egg. It is the loss of compound interest which really takes the hit. Interest added each year to interest on even fairly small amounts can grow to be a significant sum over 20 years.

Happily, it is not all bad news. ScotEq is one of the few companies, along with Norwich Union, which has promised to allow all existing customers to switch to a Stakeholder without penalty, irrespective of when the policy began.

But the customer still needs to do the sums and make the decisions. Which leads to the other major concern; where will policyholders get advice? Given that NatWest and Lloyds TSB were named in a report this week as offering poor pension deals with "hardly any redeeming features", it is unlikely to be available on the High Street. Unquestionably we have another mis-selling scandal in the making.

Yet customers will need high quality advice. The Money Management reports shows that someone who paid pounds 200 monthly for 25 years into an expensive contract would be pounds 20,000 worse off than with a Stakeholder at retirement.

Behind the scenes, the industry acknowledges that many of its pensions are more expensive than the Government's prototype would indicate. And some of them are also considerably dearer.

"These personal pensions were something special in their day. But times change and new fashions arrive. It doesn't mean they've necessarily outlived their usefulness, but they are likely to be more expensive than modern designs," said one industry insider.

Not so unlike Joan after all.