Pensions: If your pension provider is taking a hefty slice, make sure you are paying for healthy returns

• Of the millions of workers paying into a pension plan, how many know how much their provider will cream off? Picture: Getty Images

The BBC's Panorama programme this week revealed that some pension savers were paying 80 pence in charges for every 1 they invest. It said the majority of savers have no idea how much they are paying for their pensions, with little appreciation of how costs accumulate over the long term.

It used the example of a saver paying 200 a month into an HSBC pension fund over 40 years. Of the 120,000 (contributions after tax relief has been included), HSBC would take 99,900 through charges. But pension providers have hit back, arguing that while some funds clearly fail to deliver on the charges they levy, most savers are getting good value for money. For example, the 120,000 invested in the HSBC fund would still have grown to 374,600 at retirement, after charges.

The documentary stressed, rightly, that people risk wasting decades of contributions because they pay too little attention to what they are paying for.

So what should you be paying?

Annual personal pension charges are usually about 1 per cent - including any advice paid for through commission - with charges of 1.5 per cent now considered relatively expensive. The typical 1 per cent annual management charge (AMC) covers administration, fund management and marketing costs - and compares well with the average unit trust - although the charges rise when more expensive investment options are included.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "If you are paying 2 per cent a year, you are either paying over the odds or you have picked out specialist managers who are really delivering. Even at 1.5 per cent you shouldn't pay that much unless you are getting real quality."

But while the 1 per cent-a-year benchmark applies to most pensions bought since the late 1990s, millions of savers are paying into older pensions with higher costs.

Douglas Baillie, the Perth-based specialist behind www.comparemypension.com, is sent pension documents every day by savers wanting advice on consolidating their various investments. And while there remains a gulf between the best and worst providers, high charges in return for poor investment performance is a particular theme of the pensions taken out before the late 1990s, judging by the evidence he collects.

The worst offenders are with-profits pension plans, particularly the closed or zombie funds run by firms such as Resolution Life. Old retirement annuity contracts and some of the early executive pension plans operated by the likes of Hambro Life, later renamed Allied Dunbar, are also common culprits, according to Baillie.

"Since 1998 we have seen some improvements, but nothing significant compared to the last two years, when costs have really become much lower, and more competitive," he said.

Most pension providers re-priced their products ahead of the 2001 introduction of stakeholder pensions after the regulator told them their charges should not be significantly above the 1 per cent stakeholder level without good reason. Consequently pension savers now can benefit from a far more competitive market with a wider range of products and prices.

McPhail said: "If you look at the contracts from 20 or 30 years ago it is quite possible that you can get better value now. Since the late 1990s most contracts have been reasonable value for money, although there are still some good and bad ones out there."

John Lawson, head of pensions policy at Standard Life, said the Edinburgh-based insurer re-priced its pension products in 2001 to a single AMC of between 0.6 per cent (without commission) and 0.825 per cent (with commission).

"Prior to this our pension products had a 5 per cent bid/offer spread - you give us 100, we invest 95 - a 0.625 per cent annual management charge and a 2.95 a month membership charge."

Over 40 years even an AMC of 1 per cent still adds up to a considerable sum. But it's worth it if it produces a healthy retirement fund, particularly given the tax relief available on contributions and, in workplace schemes, the additional payments made by employers.

For example, 120,000 of contributions over 40 years (after tax relief) into Aegon's Uni- versal Balanced Managed per-sonal pension would produce a final pot of 547,000 after 74,000 in charges (based on 7 per cent growth each year and with the 1 per cent charge reduced to 0.75 per cent by adviser rebate).

Steven Cameron, head of business regulation at Edinburgh-based Aegon UK, said investors should remember that companies need to cover the cost of the work they do over the term of the investment.

"This can involve one-off costs such as setting up a plan and paying a financial adviser. There will also be running costs such as issuing annual statements, paying for customer services staff, production of marketing literature and the costs running a fund. In this context a charge of around 1 per cent a year does not seem too unreasonable."

Of course, what ultimately matters is what savers get back at the end. Yet consumer apathy allows some pension companies to continue cashing in on poor performance, claimed Baillie.

"There is really no reason to ever to keep pouring in good money after bad, as the higher charges and costs will continue to apply, even to new contributions made into the same policy," he said.

Finding a better deal can be easier said than done, with the complexity of pensions a common deterrent to digging out the paperwork and trying to discover if you are getting value for money.

John Moore, director at Central Investment in Aberdeen, recommended forking out for quality independent advice to put together the most suitable pension investments.

He said: "The difference in performance between a high quality portfolio investment and an average investment is considerable and far outweighs the implications of the charges which the Panorama programme discussed."