By James Salmon
Last updated at 4:43 PM on 02nd December 2009

Charges can have a devastating effect on pensions

Savers who swap pension firms can see their money ransacked by eye-watering charges and commission, a Money Mail investigation has discovered.

A 50-year-old who switches £100,000 into the highestcharging pension could pay more than that again in charges by the time he retires.

Research carried out for Money Mail by pension website www.comparemy pension.com lays bare the devastating effect these charges have on our pensions.

We took an imaginary saver and calculated the pension pot he'd be able to retire on with different insurance companies. Aged 50, he has already built up a £100,000 nest-egg and plans to retire, aged 65, in 2024.

The calculations assume annual investment growth of 7 pc and a commission payment

We've assumed all the money goes into the firms' giant 'balanced managed' funds, rather than specialist funds, which might incur extra charges. The results are startling, with a difference of more than a third between the pensions paid by the highest and lowest-charging firms.

Without charges, the saver would have £275,903. If he saves into the cheapest option, Friends Provident's Individual Pension, his £100,000 would have grown to £253,000 by age 65. Charges would have depleted his fund by 8 pc.

 But he could have done far worse. MetLife's Self Invested Personal Pension would grow to just £161,000 - with charges accounting for an eye-watering £114,903 - 42 pc of his savings.

In fairness, this pension includes expensive guarantees designed to protect you if stock markets fall.

But other pensions trailing at the foot of the table include bog-standard stakeholder pensions, which are supposed to be low-cost. Aegon's stakeholderfor example, would return just £232,000 at age 65, meaning £43,903, or 16pc, had vanished due to charges. This is a far cry from the 1.5 pc a year quoted.

Douglas Baillie, founder of comparemypension.com, says: 'The clients coming to us are surprised to discover how much has been taken out in charges. We find that in more than half of cases people will be better off switching to a cheaper pension, despite the costs involved.' Mail

'No-frills' stakeholders can be more expensive over the longer term than standard personal pensions, despite offering less choice.

This is because the commission paid to advisers is spread over the life of the contract, instead of being deducted in the early years.

This explains why Aegon's standard personal pension is the second best-performing, worth £252,000. More expensive are the new breed of Self Invested Personal Pensions, or pensions which offer expensive guarantees that investments won't fall below a certain level.

High chargers include Skandia Investment Solutions, with a projected retirement pot of £224,000, Standard Life's Sipp (£239,000) and Prudential's Flexible Retirement Plan (£241,000).

Much of the damage can be done by commission paid to advisers - either when you set up a pension or switch to a different contract.

Scottish Widows, for instance, pays upfront commission of £5,000 on a £100,000 lump sum to encourage advisers to sell its stakeholder pension.

This is clawed back through charges and will lead to a smaller pot - £237,478 - at retirement.

Read more: http://www.dailymail.co.uk/money/article-1232678/The-eye-watering-charges-destroy-pension.html#ixzz0Z17SbeKK

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