SAVERS who have ploughed billions into do-it-yourself pensions are being urged to review their schemes, as experts sounded warnings about the potential for two new mis-selling scandals.

There has been a huge surge in the sale of self-invested personal pensions (Sipps) since April last year when an overhaul of the rules made them more accessible. But in the rush to make a quick sale, there are fears that millions of investors could be receiving dud advice.

High-flyers who were advised to put large bonuses into Sipps are now warned they could face an unexpected tax bill.

Andrew Barnes at Bestinvest, an adviser, said: “We are going to see a lot of mid to high earners losing out if this advice continues to be given without due care - it is tantamount to mis-selling.”

Scottish Life, meanwhile, has accused rival insurers like Standard Life of mistreating customers by tempting them into higher-charging Sipps when a lower-cost personal pension would be a better option. Here we explain what is at stake.

Bonus scandal

Until last year, pension contributions were limited to between 17.5% and 40% of earnings, dependent on age. For company pensions, the limit was 15% of earnings, excluding employer contributions. This made it difficult, if not impossible, to put your bonus into a pension.

However, you can now pay in sums up to 100% of earnings to a maximum of £225,000.

Top bonus earners have been encouraged to push six-figure bonuses straight into their Sipps.

Although maximising your pension contributions tends to be a good idea, putting too much in could have a sting in the tail as there is a cap on the untaxed value of your retirement fund.

Called the lifetime allowance, it is £1.6m this year and will rise to £1.8m by 2010. If you breach this there is a 25% tax, called the “recovery charge”, on any amount above the lifetime allowance. So if your fund were worth £1.7m and the cap were £1.6m you would pay 25% on the difference of £100,000 – £25,000.

Pension income is also subject to tax. So a higher-rate taxpayer who takes the whole fund as income would pay 40% on the remaining 75% (£75,000) of the fund over the cap. That bill would be £30,000.

The total tax could therefore amount to £55,000, an effective 55% tax rate.

Barnes said: “Someone paying in a six-figure bonus in their thirties could breach the allowance by the time they retire. We have seen evidence that some advisers aren’t pointing this out in their rush to make a sale.”

Costly advice

Sipps can offer more investments than company pensions or traditional personal plans, including commercial property, individual shares and unit trusts.

But many investors are not using the extra freedom, claims Alasdair Buchanan of Scottish Life, which means taking out a Sipp could be a mistake.

He said: “Some life offices appear to have used the launch of new Sipp products as an excuse to increase charges. Our concern is that investors are not using the Sipp flexibility and only using the investment funds that are offered through the cheaper personal pension.”

He points out that savers in the Standard Life Sipp with funds under £50,000 are paying an annual management charge of 1% a year. They could invest in many of the same funds through Standard Life’s personal pension for just 0.7%.

Scottish Widows charges 0.65% a year on a £50,000 lump sum investment into its Sipp, compared to 0.55% for those in personal pensions.

Paying the extra cost may be justified for those who take out a Sipp for its flexibility and extra investment options. The worry is that some advisers are shunting people with personal pensions into Sipps solely because of the fat commissions.

Money Management magazine estimates that an adviser arranging a £300,000 Sipp investment could pocket about £7,500 upfront and a further £1,500 annually. That works out at £37,500 over 20 years.

Andrew Tully at Standard Life said: “We don’t force anyone to choose our Sipp. Only 40% of money in our Sipp schemes is invested in standard personal pension funds, which suggests savers are using the extra freedom.”

WHY CHARGES MATTER

If you invested £50,000 in a Sipp charging 1% a year, after 30 years your fund would have grown to £282,000, assuming an annual investment return of 7% If the same investment went into a personal pension charging 0.7%, your pension would be worth £308,000 Commission is often added on top of other charges, increasing the overall cost of owning a pension.

SIPP ALLOWED GREATER FLEXIBILITY

Derek and Bridget Bartram, from Sandhurst in Surrey, intend to make the most of their Sipp, which they set up in February because they wanted extra flexibility.

They were tired of their pensions sitting in underperforming with-profits funds and wanted access to a wider range of investments than were available in a standard personal pension.

The couple were aware that some Sipps had high charges, so they went for one of the cheapest on the market from Hargreaves Lansdown.

Derek, 57, a retired financial director, said: “I don’t need the income from my pension until I hit 65 and wanted to make the most of it during the next eight years. The Sipp enabled me to invest in mining shares as well as funds. I’ve even put money into Standard Life, one of my old pension providers, as I think they are going to be taken over.”