Call for 0.5% cap on pension fees
Consumer group Which? is pressing the Government to lower its proposed cap on pension charges so that retirement savers are not placed into "rip-off" schemes.
Which? said that setting the cap for managing a fund at a lower level of 0.50% rather than 0.75% as suggested by the Government could result in someone being £40,000 better off at retirement.
Last week, the Government unveiled plans to cap the annual charge for managing a pension pot at around 0.75% to 1%, amid concerns that people are at risk of being placed into pensions with high fees which will eat away at their savings and wipe thousands of pounds off their eventual retirement income.
A consultation paper has been launched and the Government has said that any final cap could lie somewhere between the two levels suggested.
Firm plans are set to be put in place next year, as automatic enrolment of people into pension schemes continues. Auto-enrolment started last year with larger firms and the landmark reforms to boost the number of people saving for their later years will eventually create up to nine million people newly saving into a pension or saving more.
Concerns have been raised that as smaller firms with less experience of pensions are brought into the reforms, they will be at a greater risk of placing workers into old and high-charging schemes. Charges in schemes set up before 2001 are around 26% higher than those set up since.
Which? is running a campaign called "hands off my pension". Its research has found that more than one-third (35%) of people who have opted out of auto-enrolment, or plan to opt out, say this is because they do not trust the pension industry to look after their money, and one in five (22%) are concerned about the quality of the scheme.
The consumer group pointed to modelling in the Government's consultation document, which found that someone saving throughout a working life of 46 years could lose £132,300 through pension charges with a 0.75% annual management charge. But with a 0.5% charge the amount they would lose would be cut by 40,500 to £91,800.
The calculations are based on someone contributing £100 a month, with contributions growing by 4% annually.
While the industry has been working to improve transparency and the average charge on new pension schemes set up in 2012 is around 0.51%, the Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65 billion worth of assets which are subject to an annual charge of above 1%.
The OFT recently called for a tougher clampdown on charges and warned that "most employees do not engage with, or understand their pensions".
But it stopped short of recommending a cap on charges, raising concerns about how costs would be defined and also that providers may see a cap as a target.
Which? executive director Richard Lloyd said: "While we strongly support the direction of the Government's plans, there is an urgent need for better minimum standards for all workplace pensions so people can be confident that they are being enrolled into high quality, good value schemes.
"With consumers being squeezed by the rising cost of living, there is no room for rip-off pension schemes in the workplace."
A Department for Work and Pensions spokesman said: "We are consulting on a charges cap which could be as low as 0.75% and we look forward to receiving responses from a range of stakeholders."