Charges drain pension pots

Part of our extensive survey coverage of personal pensions over the years has, of course, always included the effect of charges. But times are changing, and with the advent of RDR at the end of this year we are beginning to see the start of a three tier pricing system. Many providers are beginning to launch factory gate priced policies. With these there is no inbuilt cost of advice and this has to be added to the pension costs to determine the final expense. Other providers are offering customer agreed remuneration (CAR) where charges pre agreed between the client and the provider for advice are taken out of the contribution and passed on to the adviser.

Before the RDR was mooted, most personal pensions were sold with commission built into the equation. Any adviser who was fee based was largely required to accept the commission payment and rebate it to the client, usually through the policy so that it boosted the pension pot.

Commission based sales still account for the majority of personal pensions currently purchased, and may well do so in the run up to the introduction of RDR. But post RDR commission based plans will no longer be available. Fees are going to become more common, and those not fee based will be using customer agreed remuneration (CAR). We felt it was high time to revisit the whole subject of personal pension charges.

In the past, our surveys have had one Table for all providers, asking them to quote on the terms on which the bulk of their business was carried out.

The problem with this was that some were already quoting factory gate priced policies, which meant that showing their figures in the same Table as those plans that were commission loaded became skewed in favour of the former.

So for this survey we have asked for two sets of illustrations of the effect of charges – one for factory gate priced pensions and the other for current commission loaded terms, so that we are largely able to compare like with like.

shows both factory gate priced products and those with commission still loaded into the equation, but separated between the two systems. We have based the illustrations on the biggest internal balanced managed fund – where the bulk of pension contributions are invested – for each provider, and the largest externally managed UK All Companies fund, to give an example of additional charges that might be levied for specialised external fund management.

It is annoying that many companies are unable to provide us with unrounded figures, which can hugely distort the outcomes, but this is a throwback from FSA requirements regarding illustrations of the effect of charges, ie that the figures be rounded to a significant zero.

Although some companies’ computer systems calculate the exact figure before rounding, others do not, and as the latter are unwilling to work out the figures individually, we have to accept rounded figures in several cases.

There were also a few no shows to this survey. HSBC declined to participate, saying that it does not offer its policies through IFAs. Of course, our surveys have always tried to include every provider, regardless of whether the product is available through IFAs or not. And regular readers may remember that in past surveys HSBC has come out with the highest charges.