Rip-off charges damaging savers' pension pots
High charges are eroding the value of savers' hard-earned pension pots, a report from Consumer Focus shows.
The report, which investigates whether individuals receive correct advice on their pension options and switching, claims pension savers are encouraged to switch into new unsuitable, pension arrangements that may incur higher fees – or more risk.
Referring to this process as 'churning', Consumer Focus says some independent financial advisers choose products for their clients that reward themselves with a good level of commission rather than those that are most suitable for the consumer.
Nearly a third (30%) of IFA pensions business is through transfers and consolidation, yet in its 2010 review, the Financial Services Authority found that 34% of advice was viewed as unsuitable.
The FSA also estimates that IFAs receive £200 million in trail commission every year, yet nearly three-quarters of the people it surveyed didn't realise their adviser received an on-going fee. Trail commission is said to be increasing, ahead of the now delayed Retail Distribution Review.
Other worrying findings from the report include 53% of those questioned had no contact with an IFA and 14% had no dealings with their personal pension, bar the annual statement.
Consumer Focus is calling on the FSA to investigate churning practices further and for pension providers to make charges more transparent.
Pensions campaigner and director general of Saga Ros Altmann welcomes Consumer Focus' recommendations, which call on the FSA "to finally sit up and take notice of the bad practices that are doing such damage to ordinary people's pensions".
Tom McPhail, head of pensions research at Hargreaves Lansdown, disagrees with some of the points in the report. He claims trail commission has its place as long as advisers are providing a good level of service.
He also disagrees that charges have as big an impact on pension pots as the consumer body suggests: "As Consumer Focus highlights, charges will make a difference to pension payouts, however charges are the least significant factor affecting payouts."
Increasing charges from 1% to 2% a year would reduce payouts by 24%, yet reducing charges to 0.3% will increase payouts by 22%. Despite these figures McPhail maintains these differences are "negligible" compared to the effect of low contributions, not starting to save early enough or making bad investment choices.
"The biggest challenge individuals face over the next few years is to take responsibility for their own retirement savings and make them work as hard as possible," he says.
HOW TO BUFFER AGAINST CHARGES:
Start as young as possible:
If your employer offers a personal pension scheme and you can afford to forfeit a small amount of your salary a month, start saving into it as soon as possible to benefit from employer contributions as well.
For example, starting a pension at age 22 instead of age 25 increases payouts by 21%, while waiting until you're 35 would reduce payouts by 48%, according to Hargreaves Lansdowne.
Contribute as much as you can reasonably afford:
Given that the money comes straight out of your paycheck, could you afford to up your pension payments? Increasing contributions from 10% to 20% will double your payouts. The difference is more when cutting contributions: reducing from 10% to 5% monthly payments would reduce payouts by 50%.
The Pensions Advisory Service (pensionsadvisoryservice.org.uk, 0845 601 2929) offers free, impartial advice. If you would prefer to use the services of an IFA, unbiased.co.uk will help you find advisers in your area and with specific expertise. You can also look for advisers that charge set fees rather than commission.
Read the small print:
It's here that you'll find information about charges and any payments made to an IFA. For any details you don't understand, contact your pension provider or IFA. Also be sure to keep your paperwork in a safe place so you can refer to it at later dates.
Regularly review your pension:
You may need to change where your pension is invested because of a change in circumstances or because your pension isn't performing well. It's worth reviewing arrangements on a yearly basis.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.