Millions pay ‘extraordinary’ pensions fees

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Millions of pension savers are entering retirement with their pension funds eroded by “extraordinary” charges, with some losing more than a third of their savings in providers’ fees and advisers’ commissions.

As growing numbers face the prospect of a poorer retirement due to rising inflation and record low annuity rates, a new survey has revealed that many savers with personal pensions, estimated at 11m individuals, are paying tens of thousands of pounds to fund managers.

Money Management, the Financial Times magazine, has calculated that a saver making monthly contributions of £200 over 25 years could lose up to £37,000 – almost a quarter – in charges, assuming investment growth of 7 per cent a year.

On a single lump-sum contribution of £10,000, the impact of fees is greater, with one Skandia fund losing 39 per cent of its potential value in charges over the same period.

“This is an extraordinary figure,” the pensions minister, Steve Webb, told the FT this week. “This research highlights the fact that even apparently modest charges can add up to take a large slice out of people’s pensions. We have powers to cap charges if we believe that they may be excessive and we are looking seriously at whether we should do so.”

The National Association of Pension Funds said that even the industry’s average of a 25 per cent reduction in a fund’s value due to fees in a single £10,000 investment – as shown in the survey – was too high.

“We have been saying for a while that costs and charges need to come down,” said Joanne Segars, chief executive of the NAPF. “It is absolutely crucial that pension savers know that they are getting good value for money.”

Which? the consumer group, said it was “perverse to allow such high charges”. Independent financial advisers pointed out that the effect of charges has become more pertinent as pension fund performances are adversely affected by market volatility and low interest rates.

The number of personal pensions has risen as workplace retirement schemes, which guarantee to pay employees a portion of their salary, have all but disappeared.

Skandia, which was found to have the highest charges for regular and one-off pension contributions, and other providers defended their fees – pointing out that they were not just for administration, but also to cover financial advice and active fund management. They also said charges could be justified by their funds’ performance.

Some added that the results were skewed by the inclusion of commission payments, which are being banned in 2013. “Individual pensions are also more likely to involve advice cost,” said the Association of British Insurers. “We would expect advisers to shop around to get the best value for their clients.”