PENSION savers have been told to take matters into their own hands after a review confirmed that billions of pounds remains stranded in expensive “legacy” schemes.
The pensions industry is under renewed pressure to cut costs and scrap exit fees after research revealed that up to £26 billion lies in poor-value pension schemes charging over the odds.
But with pension firms given yet another year to deal with the issue, the onus is on savers to know what they’re being charged and, where necessary, take action.
The latest report to produce damning findings on charges came from the Independent Project Board (IPB), which included representatives from the Pensions Regulator, the Financial Conduct Authority and the Association of British Insurers.
Ordinary pension savers have £25.8bn trapped in schemes with high charges, it said, although it stopped short of naming the main culprits.
The outcome mirrored a 2013 probe by the now-defunct Office of Fair Trading, which estimated that £2.65bn in workplace pension savings is held in schemes with annual charges above 1 per cent. While the average charge on schemes launched over the past decade is just 0.51 per cent, many older plans have charges of up to 2.3 per cent a year.
The IPB report focused on legacy schemes set up prior to 2001, when the launch of stakeholder pensions ushered in an era of lower charges. But more than £12bn has been paid since then into schemes with charges significantly above 1 per cent.
Savers with the smallest pension pots are at particular risk of being fleeced. Most of the £900 million being charged at 3 per cent is in pension funds worth less than £10,000, according to the IPB.
A £10,000 pension pot generating returns of 5 per cent would lose £4,775 in fees over ten years if the charges amounted to 3 per cent, said Gina Miller, founder of the True and Fair Campaign.
“The rip-off goes way beyond the figures published by the IPB, and introducing a cap on pension fund fees will achieve nothing unless all hidden costs and fees are included in the figure,” she said.
Anyone automatically enrolled by their employer into a defined contribution pension scheme from April 2015 will have management charges capped at 0.75 per cent under reforms set out last year.
But even that does nothing to address the pension charges “rip-off”, Miller said.
“It doesn’t include transaction costs, which we estimate as being 0.41 per cent on average, and when you add in the effect of compounding over say ten years, returning 5 per cent, the numbers are even more frightening,” she said.
“All fees disclosed in full, in an understandable format and in pounds and pence, must be required from pension providers as a matter of urgency.”
In the meantime the onus is on consumers to make sure they’re not paying over the odds and losing valuable retirement funds to fees and charges.
Many people – typically those without an adviser – are simply in the dark as to the amount of their pension savings that’s being lost to charges.
“Some people think ‘I’ve got a pension policy therefore I’ve ticked that box and don’t need to do anything more’,” said Brian Steeples, chartered financial planner at The Turris Partnership in Glasgow.
“This is dangerous thinking. Your pension plan needs to be reviewed at least every three years and preferably every year, especially in the decade prior to anticipated retirement.”
If you’re not sure how much you’re paying in charges, check your pension statements or ask your provider to tell you what charges it’s taking from your pension pot.
“Ask them to express this charge as an annual percentage charge and to confirm the current fund value and the current transfer value,” said Steeples. “The difference is the exit penalty.”
Some £3.4bn of savers’ assets are locked in schemes with potential exit charges of 10 per cent, the IPB report found, acting as a significant deterrent to switching.
However, there is a possible way around this, according to Steeples.
“The exit charge is a contractual charge. However, you could ask the pension provider if they think it would stand up to a regulatory challenge of an unfair contract term and not treating customers fairly.”
There’s also the option of asking the provider if it will let you transfer to a lower-charging pension within its own range, where the exit penalty wouldn’t apply. There are instances where it’s best to stay put, however, such as where there are annuity guarantees that could be very valuable.
But working out exactly what scheme is best is difficult, not least because the IPB review identified 38 different types of charges and 291 different charging structures. That makes independent financial advice invaluable, albeit potentially inaccessible if you have less than £50,000 to invest.
“They will be able to help identify what charges are being made and whether a better alternative exists, either within the existing pension provider’s fund range or alternatively with a different cheaper provider,” said Steeples.