The hidden fees that are halving the value of UK pensions

Pension savers are being misled about the hidden costs and charges they have to pay.

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Harinder Mann is a researcher at the RSA

Imagine saving for a pension your entire working life to be told that when you retire, half of your pension pot has disappeared on fees. That’s the future facing millions of UK pensioners when they come to retire.

Pension-fund-boxOur report (pdf), released today, shows why we need a radical shake up of the way in which the pensions industry works.

Our year long study shows how pension savers are being misled about the hidden costs and charges they have to pay.

These charges can half the value of a typical pension. A 2% charge a year doesn’t sound like much, but over the lifetime of a pension that reduces the pot by over 50%.

In the UK we’ve seen over the last generation people move from company schemes in which the benefits had been agreed to ones which people are savings via individual savings accounts. Employees within large companies tend to be served well, with costs and fees negotiated and discounted for the saver.

However, for small companies and individuals that’s not necessarily the case. With the introduction of auto-enrolment, we need to ensure that markets are transparent, so savers can see how their pension is invested, what charges are being applied, and so that the good schemes can survive and the bad ones be weeded out.


See also:

Poll: 68 is too late for state pension, is “unfair” and will hit the poorest hardest 8 May 2012

Osborne’s ‘granny tax’: Robbing pensioners to pay the one per cent 19 Apr 2012

Osborne’s ‘granny tax’ will sting those on a personal pension of just £67 a week 19 Apr 2012

Government gold-plates private pensions while cutting public ones 27 Jan 2012

Raising the pension age will be a public health disaster 18 Dec 2011


This is how markets should work, so that consumers have confidence restored in the products and investments they are making.

In our report we looked at the levels of transparency in retail pensions. We conducted a survey and contacted a sample of 23 pension providers in the UK. We asked them what charges would be levied to the pension investment? What other charges would be levied apart from the Annual management charge? What the breakdown of charges was?

Our results showed that 21 out of 23 pension providers denied that any additional charges other than the annual management charger existed.

Not one provider was willing to give us a full breakdown of the costs that would be charged.

We also asked, what a good system would look like. We found four elements would be needed to deliver transparency to pension system in the UK.

The system would have to be:

Clear and easy to understand; it would need to be comprehensive, giving a full detailed breakdown of costs; thirdly, it would need to be capable of reconciliation.

Like a bank statement, the customer should be clear how the provider has arrived at the declarations it has made. Finally, it needs to be low-cost to produce – the information should be provided so that it does not place an administrative burden on the industry that would be passed on in higher administration fees to the fund. So, ideally, it should use the same accounting systems that are already in place.

Our critics would argue that the fees we quote are too high, that to introduce a system like this wouldn’t work, it would be costly and only increase the fees being charged. Our response to that would be to look to our European neighbours. They have managed this, and Holland is following suit very soon.

Our research showed that the costs of running a fund must be known to individual pension funds.

So why haven’t they been revealed to the customers who ultimately feel the burden as we’ve described? If we know what charges are, then people can work out for themselves what level of charges are proportionate.

With the backdrop of less and less people saving towards their pension, the need to build a system that is trustworthy, transparent and easy to understand is the solution to getting people to save for their retirement.

If we don’t act now, we face an even greater problem in the future with more people going into retirement facing severe financial difficulty.


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