A Remedy For A £5 Billion Rip-off

This unusual alternative to traditional pension plans does away with the rip-off fees which old-fashioned plans charge!

I wade through hundreds of press releases each week from scores of financial firms, 99% of which aren't worth reading. However, one press release at the weekend caught my eye, because it seemed to describe a financial product which is genuinely new and original.

The press release which caught my eye announced the launch of theiaccount from Intelligent Money, a revolutionary new pension with ultra-low charges. "Oh yawn, not boring old pensions again", I hear you grumble. Joking aside, we could all do with taking pensions more seriously, because they are a massively important aspect of our financial lives.

Here's a startling fact: here in the UK, we have over £330 billion invested in personal pensions. Amazingly, pensions providers trouser £5 billion of our money each year in charges, which is enough to pay the annual basic state pension to almost 1.2 million pensioners. What's more, it's more than the £4.3 billion which we collectively contribute each year, so we're running to stand still!

Regrettably, these charges reduce our returns from pension by about 1.5% a year. This may not sound like a great loss, but this annual 'breakage' seriously cuts into the size of our pension pots come retirement. What's more, pension fees tend to be percentage-based rather than flat fees, so the annual fees which we pay increase in line with our pension pots. Boo, hiss!

That's why I was delighted to learn that theiaccount pension plan charges a flat annual fee of £35, which is a fraction of the charges deducted by other pension plans. For example, even my cheap and cheerful Stakeholder pension charges 0.7% a year, so I lose over £100 a year in charges to the plan manager.

Now for the technical stuff: theiaccount is actually a form of Self-invested Personal Pension. SIPPs are a form of DIY pension in which you, the investor, decide where and when to invest your money. In effect, with a SIPP, you become your own fund manager. However, with theiaccount, your money has to be divided equally between two pots, one linked to the stock market and the other to property.

For example, if you invest in theiaccount before 22 September, half of your money will earn a guaranteed return of 140% of the growth in the FTSE 100 index over the next ten years. The other half earns 140% of any growth in the Halifax House Price Index (HHPI) over the same decade. Gains are locked in every ten years and, as with all pension funds, they are tax free. What's more, assuming that you stay the course, you cannot get back less than you put in, although the value of your money will be reduced by inflation (rising prices).

Below is an example of the difference ultra-low charges make on the size of your final pension pot, based on a 30-year-old person saving £200 a month until age 65, a total of £84,000. This assumes annual investment growth of 7%, with theiaccount's annual fee of £35 rising by 2% a year.

So, what's the catch? In effect, theiaccount does have an additional layer of built-in 'charges', because you only benefit from any increase in capital growth, that is a rise in the FTSE 100 or the HHPI. What you don't get is any of the income generated if you'd actually bought these investments directly. So, this means no dividends from shares and no rental income from property. What a shame!

Giving up your investment income in return for a no-lose guarantee can be a very expensive option; I've criticised similar 'structured products' known as guaranteed equity bonds, or GEBs. Then again, your capital in theiaccount is very safe, since it's safely tucked away in a deposit account with the Royal Bank of Scotland, the UK's second-largest bank. Note that your returns come from 'options', a form of financial derivative bought, in effect, by diverting the savings interest generated by your pot.

For the record, anyone who is under 65 and at least ten years away from retirement can open theiaccount, with a minimum investment of £50 a month or a lump sum of £500. You can also transfer existing pension pots into theiaccount, although your existing pension providers may penalise you for terminating your plans.

Although I can see theiaccount will appeal to many cautious and prudent investors, I don't think that it's for me. That's because it's a curate's egg - it's only good in parts! Personally, I think that UK housing is hugely overvalued; indeed, it's now more expensive than at any time since the Industrial Revolution. Hence, I expect returns from property to be pretty feeble over the next decade, so I don't like this half of the cake.

So, great news about the £35 flat fee (which might catch on elsewhere), but I'll stick to investing my pension contributions into a cheap, simple index-tracking fund until something superior comes along.

More: Use lovemoney to compare pensions, compare investments and compare savings accounts!