An estimated 1.4m British workers’ pension funds are being slashed by up to a quarter because their ex-employers are slapping extra charges on pots they no longer save into.
Department for Work and Pensions (DWP) data shows these "unethical" charges are on the rise, with an increasing number of company pension schemes choosing to use them.
These employers commonly charge ex-staff twice the annual fees current workers pay to have their pensions looked after, which hacks huge chunks off their pension pot by the time they retire.
Retail giant House of Fraser ramps up the pension management charges staff have to pay by more than double when they leave the company, taking the fees from a very modest 0.4 per cent - to a middle-of-the-road levy of 0.9 per cent a year.
The extra 0.5 per cent charge might not sound like much, but over time it makes an astounding difference. It means a member of staff who has saved £100,000 in their pension and leaves the company with 25 years to go until retirement, will end up £54,800 poorer. This is because assuming a 7 per cent annual growth on the investment, a charge of 0.4 per cent would result in a pension pot worth £494,230, whereas a 0.9 per cent charge would result in a pot worth just £439,430.
And technology firm CSC Computer Sciences, which charges current staff 0.15 per cent in pension fees, makes former staff pay 0.57 per cent for the same services once they stop working. The only way they can dodge the extra charge is if they continue to pay £20 or more in to the plan every month for the rest of their working life. But Scottish Widows, the pension provider for the scheme, confirmed 87 per cent of savers presented with this choice end up paying the extra charge because they don't continue contributions.
Following a stack of evidence that this practice is rife and is seriously damaging well over a million people’s savings, last week the government was urged by the Department for Work and Pensions Select Committee, a group that advises them on pension policies, to ban them without delay, "to prevent any more consumer detriment".
Currently, one in five company pension schemes with pensions linked to the stock market, otherwise know as defined contribution or DC schemes, are making ex-employees pay these extra charges. And giant corporations are just as likely to do it as small enterprises - as 19 per cent of FTSE 100 companies with DC pension schemes are lining their pockets with the charges, according to a recent Towers Watson report.
The extra costs are hidden in the small print of pension literature. Confusingly the practice is referred to in the literature as "active member discounts" - a name some pensions experts say is deliberately designed to throw people off the scent of their real purpose, which is to charge ex-staff - technically called "deferred members" - extra so companies can make extra profit.
Data from US agency Bureau of Labour Statistics shows the average worker changes jobs 11 times in their career, meaning that by the end of most people's working lives, they are likely to have a number of pension pots they are no longer paying into. It is these pots that are vulnerable to extra charges for deferred members that silently gobble their money.
Research conducted by the consumer body Which? revealed that in the worst cases, deferred member charges can chop a quarter off the value of people's pension pots - making them significantly poorer when they have to use it to buy an income in retirement. It found deferred members of pension schemes are being charged up to 1.4 per cent in management fees while current staff pay no more than 0.75 per cent.
Henry Tapper, director at first actuarial, described the practice as "borderline ethical". He added: "Companies are in very dodgy water when using this tactic. It’s a question of equality. Why should ex-employees pay more than current ones?"
How to spot rip-off charges on your pension pots
Deferred member charges are a big problem and although the government and associated bodies say they are going to do something about it, you can't rely on this being any time soon as they have been making noises about it for a while - but to no avail.
Ask your former employers whether an active member discount was applied to your pension money - and find out what you are being charged now, compared with the fees that were advertised when you were actively paying into the scheme. If you find you are being charged more than you thought, there are two routes of action you could take:
1. Transfer pensions from past employers into your current pension scheme
You could ask to move money out of pension schemes run by former employers and into the pension plan you currently pay into via your workplace, consolidating all your bits of pension into one tidy parcel that's easier to manage.
All you have to do is tell your current pension scheme where your other pensions are, and they will do the rest of the work, normally for a small administration fee of around £100.
Not all schemes will allow a transfer in, however.
Plus a downside is that the average company pension scheme charges around 0.9 per cent to manage your pension if your money is invested in the default fund - and anything up to 1.4 per cent if you've opted for higher-risk investments not included in the default option. If you’re content with how the default fund is performing or you don't want the hassle of transferring money then it might be best to leave the money in your company pension plans.
But default funds have a dreary reputation and many only manage weak investment returns. Laith Khalaf, head of corporate research at Hargreaves Lansdown, says the reason workplace schemes can be run on a shoestring is because these mundane funds are often cheaply run and have a big passive element to them, which means they are fairly low maintenance. In other words, you get what you pay for.
2. Transfer your old pensions into a Sipp
If you’re being charged double fees for a default fund that's simply not performing and you've got ideas about where else you’d like to invest your nest egg for higher returns, consider transferring company pension money into a low-cost self-invested personal pension (Sipp).
In a Sipp you have to manage your money yourself but you can potentially cut the cost of investing compared with your old scheme. If you’re careful to choose actively managed funds with reasonable costs you can have a Sipp for as little as 1 per cent a year (according to www.candidmoney.com)- cheaper than many company pension plans that charge up to 1.4 per cent for managing your money.
| Provider | Initial Sipp charge | Annual Sipp charge | Transfer in fee | Transfer out fees | Online dealing costs for buying shares | Loyalty bonus on funds | |
| Trades per month | Cost per trade | ||||||
| Sippdeal | £0 | Funds: £12.50 per quarter if investing in certain funds (only one custody fee charged regardless of number of different investments held). Shares: £0 | £0 | £75 + VAT | 0 to 9 | £9.95 | Up to 0.50% per year |
| Hargreaves Lansdown | £0 | Funds: 2,400 funds trigger no platform charge. A small number of funds trigger a platform charge of £1 or £2 per month. Shares: 0.5% per year, capped at £200 | £0 | £75 | 0 to 9 | £11.95 | Up to 0.50% per year |
| Best Invest | £0 | Funds: £0. Shares: £100 + VAT per year | £0 | £60 | N/A | £7.50 | Up to 0.50% per year |
| Alliance Trust Select SIPP | £0 | £135 + VAT | £50 + VAT per transfer | £125 + VAT | All | £12.50 | None |
| Fidelity | £0 | Platform charge: 0.25% per year, Plus: Service charge* | £0 | £75 + VAT | Not applicable | Not applicable | Up to 0.75% per year |
Source: www.investmentsense.co.uk
Note: When buying funds additional costs, including annual management charges, will apply. *Up to £30,000, 0.40% per year; £30,001 to £100,000, 0.30% per year;£100,001 to £500,000, 0.25% per year; Over £500,000, 0.20% per year.
Warning: Watch out for transfer penalties
When transferring pension pots into your current company pension scheme or into a Sipp, look out for transfer penalties. These are particularly common in with-profits funds, and may cap the returns on your investments if they are moved out of the scheme, meaning it might be better to leave them alone.
Also check out any additional benefits that may be attached to old pension schemes. Some schemes may have guaranteed annuity rates or allow you to retire at an earlier age than 55.
Do you feel like your company pension is ripping you off? We want to hear about it. Email Katie.Morley@ft.com.
