Pension charges rise: Higher costs and commissions will lower the final value of policies

NORWICH UNION, one of the largest pension providers in the country, is raising front-end charges on its main personal pension scheme next month, only weeks after announcing large cuts in bonus payments on savings and pensions.

On regular premium contracts taken out from next month, the company will claim 40 per cent of premiums within the first two years instead of 30 per cent. The cash is used mainly to pay commission to brokers and sales staff.

The net effect is that someone taking out a monthly or annual premium pension will have 10 per cent less invested in the pension in those years.

This will take hundreds of pounds off the final value of a pension policy.

Next month's change follows a rise of 37.5 per cent last April in the monthly policy fee levied on personal pensions. It rose from pounds 2 to pounds 2.75.

The front-end load was last increased in 1988. Since then, commission payments have risen, and Norwich Union says charges must go up to cover these costs, and to pay for the increased cost of running personal pension schemes.

The Norwich Union changes confirm a trend of rising charges that are being imposed on pension and savings contracts. These are being pushed through despite steep cuts in bonuses on with-profit contracts, but companies say the two moves are not directly related.

Bonus cuts fall heavily on traditional with-profit contracts, which many companies no longer use for new pension contracts. Lots of pension providers, including Norwich Union, still offer the option of investing in a with-profit fund, which relies on regular bonuses for increases in its value.

Norwich Union recently cut the bonus on its fund from 10 per cent a year to 8 per cent.

Scottish Equitable raised charges for new personal pension contracts last September. The insurer sweetened the pill by introducing some loyalty bonuses, although it admits that in the short term its revenue will increase as a result of September's changes.

Another large pension provider, NPI, increased the annual investment management charge on six pension funds from 0.75 per cent to 1 per cent during the course of last year.

Personal pensions are subject to a range of complex charges not easily understood by policy holders.

Norwich Union's higher front-end loads on its personal pensions mean that someone putting in an annual premium of pounds 1,000 next month will have pounds 570 of investments credited to the policy. Last year there would have been a credit of pounds 665.

However, these figures are arrived at after two sorts of charges are taken out of the premium. The new front-end load reduces the pounds 1,000 to pounds 600 ( pounds 700 last year), but there is also a 5 per cent initial charge on units in the investment fund.

As well as the front-end load, the initial charge on the units and the monthly fee of pounds 2.75, there is also an annual management fee of 0.875 per cent, which is not changing.

Insurance companies must inform policy holders about increases in charges, but their effects over the life of the policy will be evident only to the mathematically adept. When selling a pension, the insurer must show the effect of expenses, by quoting how much the policy's annual return will be reduced.

On a 10-year policy taken out under Norwich Union's old charging structure, the annual return was reduced by 2.7 per cent. From next month, this reduction will be 2.9 per cent. On a 25-year policy, expenses will now reduce the yield by 1.6 per cent, compared with 1.5 per cent before.

John Dymond, development manager at Scottish Equitable, said the company introduced a new charging structure on its personal pensions from 1 September.

The annual investment management charge rose from 0.75 per cent to 1 per cent. Scottish Equitable also introduced a new penalty on 'paid-up' policies in the event savers stop making regular contributions. The penalty works on a sliding scale.

The insurer also increased the monthly policy fee by 5 per cent, to a total of pounds 2.75.

Scottish Equitable introduced early retirement penalties in 1988, and they normally apply unless an individual retires within five years of the retirement date originally chosen.

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