Sunday Express

October 28, 2001

Money saving expert Martin Lewis explains how to boost your pension fund by thousands for a cost of just £25

Imagine going to a restaurant and ordering your food only to be presented with a supermarket ready meal and a microwave, told to sort it yourself and being charged the full silver-service price. It is likely the waiter's clothes might become suddenly and intimately acquainted with your food.

Buying a stakeholder pension direct is probably doing something similar. This week's deal shows how to increase your pension fund by nearly 7 per cent, just by buying it a different way, making a gain of nearly £12,000 at a cost of just £25.

Stakeholder pensions were launched with much hype in April (2001). As a product they are similar to old style personal pensions except the charges are capped at 1 per cent of the investment, whereas they used to be around 5 per cent. Some of this 1 per cent pays commission to independent financial advisers. There is nothing wrong with that, as it is to be hoped that you are paying for good advice. But buy direct from the provider, as many do with stakeholders and the same charges are levied as the provider retains all the fees.

There is a way to beat the system, using one of the UK's few pension discounters. These are specialists who sell pensions without any advice or follow-up service, so they can afford to rebate some or all of their commission into your pension. Commission may only take a fraction of a percentage point but pension funds build up serious cash over long periods, so the amount is compounded. For a £250 monthly pension over 25 years an adviser gets £620 commission upfront and then 0.2 per cent of the fund every year after the 11th year, possibly adding up to thousands of pounds.

To go it alone with a Stakeholder you need to choose your contribution level, provider and funds. As a rule of thumb, to retire on two-thirds of final salary, you would need to invest half your age as a percentage of your salary when you start your pension, and continue this until age 65. So someone starting at age 30 needs to put in 15% of their salary each year. This obviously means the earlier you start the better. When asked to choose a stakeholder provider, independent financial advisers most often recommend Standard Life and Norwich Union. As for fund choice, the younger you are the higher the risk you should take.

The cheapest discounter I've found is phone and Internet company Cavendish Online. It charges just £25 (£35 on the telephone) to buy a pension. It then reinvests all the commission received within the pension's lifetime in your plan. It is an execution only service, with no advice or after-sales care. For a little more help, discount broker Best Invest provides limited, generic advice and rebates some of its commission. In other words it sends out a guide which helps with provider and fund choice. Using a discounter isn't for everyone as pensions can be a complicated business. Some people may need to take advice on issues such as waiver-of-premiums, where you needn't pay during illness.

However if you buy without advice, using a discounter can substantially increase your pension fund. Put £60 a month in a Norwich Union Stakeholder from the age of 35 to 60 and if it grew by 9 per cent a year, with commission you would have £51,500 in your pension fund to buy an annuity. If you spent £25 to buy it through Cavendish, you would have £54,900: nearly £3,500 more. Investing £250 a month into a Standard Life pension with-profits fund through Cavendish, would achieve nearly 5 per cent more, that's 12 grand extra in the pension pot, for just £25.