Give your pension a £68,000 boost: How tackle rip-off retirement plans

Millions of savers over the age of 40 are unaware of their retirement income being slowly eaten away by rip-off fees on old pension pots.

More than seven million people who invested in workplace and personal pension funds decades ago could be affected by extortionate but little-known charges. 

These pensions are charging investors several times more in fees than they could pay for the exact same fund on the market today. 

This can apply to pensions dating back to before 2013 when new reforms were introduced.

Analysis for Money Mail by stockbroker AJ Bell finds that in the most extreme cases, you could unwittingly lose almost seven years’ worth of retirement income to these fees over the course of 20 years.

Rip-off fees: Some older workplace pensions are charging investors several times more in fees than they could pay for the exact same fund on the market today

It means that if you have a high-fee pension worth £100,000 you would be £86,632 out of pocket compared to modern-day pensions with lower charges, assuming 5 per cent annual investment growth. 

And this applies, no matter the size of the pension — for example, on an old-style £15,000 pension, you could be charged an extra £13,000 in fees over 20 years.

The Pensions and Lifetime Savings Association has estimated that the average single pensioner needs £12,700 a year in retirement above the full state pension (£10,600) to achieve a moderate standard of living. This measure is widely used by the pensions industry.

AJ Bell estimates the number of people affected could even run into the tens of millions.

On Monday, Chancellor Jeremy Hunt announced a major shake-up of the pensions industry designed to boost average retirement incomes. 

Many industry leaders hoped the reforms would put an end to the outrageous fees, after making calls for the Government to address the issue.

Yet despite a promise to improve ‘value for money’ on pensions, the Government has excluded older pensions from its campaign. This means providers are free to keep charging exorbitant fees.

In a joint report with City watchdog the Financial Conduct Authority (FCA) and the Pensions Regulator, the Government yesterday admitted many providers overseeing old pensions did have ‘limited regulatory oversight, and poor value products means savers are at risk of poor pension outcomes.’

It said: ‘We agree savers in older schemes may be at greatest risk of poor value for money… we also recognise the challenges in applying the framework to legacy workplace schemes.’

Fees charged on modern pensions have dropped dramatically in the past eight years, because since 2015 charges on default workplace pension funds have been capped at 0.75 per cent of the value of your savings.

Savers paying into a pension via stockbrokers, such as AJ Bell, Interactive Investor and Hargreaves Lansdown, or fund shop Vanguard, can pay as little as 0.37 per cent today, which includes 0.15 per cent for access to the funds and 0.22 pc for a basic fund that tracks the stock market.

Before 2015, fees were often much higher and those paying into older pensions closed to new business have continued to charge up to 2.4 per cent, according to City watchdog the Financial Conduct Authority. 

More than seven million accounts were opened before 2001, when charges were typically much higher, according to the FCA.

If you have left your money in one of these old pensions charging 2.4 per cent, you would be £86,632 worse off than if you switched your money into a modern-day pension charging just 0.30 per cent, the research finds.

Tom Selby, head of retirement policy at AJ Bell, warns that millions of savers will fall into a ‘blind spot’ as far as the new rules are concerned.

And Alice Guy, of stockbroker Interactive Investor, says it is ‘extremely disappointing’ that the Government failed to target the issue.

‘This is a missed opportunity to tackle unfair pension fees once and for all that will leave many pension savers locked in with poor performing, expensive pension schemes. 

It’s an administrative nightmare for pensions savers as they often have multiple pension schemes all with different charges, even with the same provider,’ she says.

Ros Altmann, a former pensions minister, says it is ‘unreasonable’ for companies to charge these fees.

She says: ‘If it’s an old or forgotten pension pot, there’s no new money even coming in so the provider doesn’t have much administering to do. There’s no justification to charge higher fees for less service than pension schemes that are still active.

‘Most people aren’t concerned about their pension because the standard mantra they are told by the industry is don’t worry about it, we will take care of it for you. 

If your employer chose the scheme for you, you would assume they would have done their due diligence to make sure it’s a good pension.’

Rebecca O’Connor, of pension provider PensionBee, warns many workers are being exploited. She says: ‘It’s appalling that people are being taken advantage of with really uncompetitive fees.

‘In an environment where investment performance isn’t that reliable, it becomes even more important that the fees are reasonable and competitive.

‘A lot of people have no idea that this is the fee they are paying and these providers are exploiting that.

‘We get very angry about insurers charging existing customers more when they come to renew their policies, but it goes to show how little people know about their pensions, through no fault of their own.

‘These are such large sums of money that we should be a lot angrier than we are.’

Short changed: More than seven million people who invested in workplace and personal pension funds decades ago could be affected by extortionate but little-known charges

The majority of these older pension policies are now administered by ‘closed-book’ providers, which means they do not accept any new investors.

Mr Selby says this means they have ‘no obvious incentive to either reduce charges or offer customers a better service’.

‘While most modern pensions tend to offer savers good value for money, millions bought products decades ago and are exposed to significantly higher charges.’

City regulator the FCA is introducing reforms designed to improve outcomes for savers and investors.

But Mr Selby warns these reforms will not apply to closed pensions funds until the middle of next year. ‘Even then there is no guarantee that charges will be drastically cut,’ he says.

A spokesman for the Pensions Regulator says: ‘We are aware some savers within legacy schemes might not be getting a good deal. 

‘That is why we’re introducing a value-for-money framework that will, in due course, force legacy schemes to compare their value with the market.’

The FCA previously sounded the alarm on the danger of these fees in 2019, claiming that there was a lack of pressure on these pension firms to compete on charges. However, they still persist.

Two of Britain’s largest providers Phoenix Life and ReAssure, both owned by Phoenix Group, are among those that continue to levy higher fees. These companies buy out old pension policies that have since closed to new business.

ReAssure’s website states the average costs and charges paid by savers is 1.42 per cent, which it admits is ‘significantly higher’ than those in other workplace pensions.

Most of these policies were taken out via an independent financial adviser and cost more initially because it gave them access to hundreds of investment funds.

Overcharged: If you have a pension worth £100,000 you would be £86,632 out of pocket compared to modern day pensions, assuming 5% annual investment growth

Paying 1.42 per cent in fees will cost you £50,530 more than if you switched your pension to a 0.30 per cent charge over the course of 20 years. 

At the end of 2021, the provider capped all charges at 1 per cent on its own range of funds but anyone still holding a third-party fund remains vulnerable to high fees.

It says: ‘ReAssure will actively write to customers every year with information on alternative funds and product options that can reduce charges to around 0.65 per cent.

‘There are only two scenarios where members will be charged more than 1 per cent a year in charges.

‘The first is where they are invested in third-party funds chosen by the member, typically on advice from their IFA. 

The second is where members’ initial units or capital units have a higher charge but since January 2022 our 1 per cent cap is now applied.’

A Phoenix Life spokesman says: ‘The data quoted extracted from the Phoenix Life website relates to a very small population of workplace customers who have chosen to invest their policies in more specialist external funds.’

So, what if your pension is old? 

The first step is to track down any old pensions you haven’t kept an eye on over the years.

Check to see if you have any old paperwork with the name of your pension scheme or details of the scheme administrator or provider. This should include information about how much you pay in fees.

Most pension schemes must send you a statement each year — if you have not been receiving them it might be because you changed address and failed to notify your old pension provider.

If you are struggling to find information, contact the pension provider, your former employer if it was a workplace pension, or the Pension Tracing Service.

Capped: Since 2015 charges on default workplace pension funds have been capped at 0.75% of the value of your savings

If you know the name of the company your pension was invested with, you should contact them with as many details as possible — plan number, date of birth, National Insurance number and the date your pension was set up.

Once they have found your pension pot, you can ask what charges you have been paying for the management of the pension and what the investment charges are.

If you’re still struggling to make progress, you can contact the Pension Tracing Service, which is a free Government service. You could also ask your employer if it offers any free pension guidance.

Anyone who discovers they are paying high fees should consider switching to a different provider.

You can usually move a defined contribution pension at any time before you start taking money from it in retirement. 

This type of pension has become the most common type and is a pot of money you and your employer contribute to, which is then invested in stocks and bonds.

In most cases, you can also transfer your money to a different provider even after you’ve started to take money from it but check the fine print.

Before moving your pension, have a look at the costs charged by the new provider. Pension companies use a range of different terms to label the fees that are levied on your savings.

Main charges to look out for include initial set-up fees, annual management charges for investments you might choose, service or administration charges (sometimes known as platform fees), charges for specific transactions such as taking money out of your pension and trading fees which are charged for buying and selling certain investments.

Also check to make sure that you aren’t giving up any valuable benefits by transferring out of a scheme. For example, a guaranteed annuity rate option or additional death benefits.

A guaranteed annuity rate option is where the pension company will pay you a guaranteed income every year for the rest of your life at a certain rate. This tends to be higher than the rates you would be able to get on the open market.

If the value of any guaranteed annuity rate, or other valuable benefits, is more than £30,000, you might have to get regulated financial advice before you are allowed to move the pension.

Some schemes charge an exit fee, which penalises you for moving your money away from them.

It is likely you have several pension pots if you have changed jobs and worked at different employers. You can transfer money from an old pension pot to another scheme you hold. 

Most providers won’t charge you for transferring pensions to their schemes and will track old accounts for you.

You can also move your pot into a ‘self-invested personal pension’ with a stockbroker such as AJ Bell, Interactive Investor, Hargreaves Landsdown or Bestinvest.

On these platforms you will have a large range of funds and stocks to pick from. 

Other fund groups such as Vanguard also offer dedicated retirement funds that invest in a range of assets, offering different levels of risk depending on your preference.

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