A promising new pension – but don’t rush in yet

A new pension was launched this week which promises to be even cheaper than stakeholders. The Lifetime Account will charge a flat £35 a year, an amount that is significantly less than the standard level of personal pension fees; typically an initial 3% of premiums then 1.5% of your fund per year.

Moreover, since standard charges are deducted from premiums, they can seriously erode the value of your fund, says Jill Insley in The Observer. Someone contributing £200 a month to a Lifetime Account would pay £1,225 in charges and have a fund worth £440,599 after 35 years assuming annual growth of 7%. If you invested the same into a standard plan, the fund's value would be diminished by £139,194 over 35 years, leaving you just £301,405.

The new product is sold by Personal Savings & Investments (PS&I) and is the brainchild of the entrepreneur Julian Penniston-Hill. Penniston-Hill says the fact that the pension industry currently skims an annual total of £5bn in charges is an outrage and describes it as "a bigger pension scandal than mis-selling".

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His product is based on a self-invested personal pension (Sipp) structure, which means investors can increase or decrease contributions without penalty. The minimum investment is £50 or £500 a month.

The key difference between Sipps and the Lifetime Account is that you cannot choose how your money is invested: a third will be invested in a cash account, paying 6% a year, another third pays 100% of any rise in the FTSE 100 and the remaining third pays 100% of any rise in the Halifax house price index.

Your capital is protected against any falls in these indices. PS&I said back-testing of the Account had shown that, at worst, investors would double their money in ten years and at best could expect a 164% return.

So what's wrong with it? asks Paul Farrow in The Sunday Telegraph. Experts have pointed out that the FTSE 100 return does not include dividends. Since 1984 the FTSE 100 has returned 706%, with dividends reinvested. Remove those, and the return falls to 276%.

One IFA has also pointed out that you can invest in guaranteed bonds that deliver 200% of the growth in the Halifax price index. "I'm not convinced," says William Kay in The Sunday Times. The only apparent charge is the £35 a year, but there are also the "hidden costs of options and futures trading to ensure that savers incur no losses". Penniston-Hill claims these are minimal as the risk is minimal, but if so, why hedge them?

The other off-putting aspect is that the plan is sold execution-only it comes with no advice and can therefore not be mis-sold. Traditional pension providers certainly do overcharge, but you could achieve the same objectives by putting some well-managed funds into a Sipp. Next year's rule changes will doubtless spawn a host of competitors; "there's no need to rush into this one".