Over £1billion savings lost from pensions last year due to ‘rip-off’ charges – how to avoid them

MORE than £1billion of retirement savings is estimated to have been lost because savers have switched to pensions with higher charges, new analysis has found.

Pension provider The People’s Pension has found that UK savers could have lost £1.2billion in just one year as a result of unwittingly transferring to pension schemes with higher fees.

The firm found the number of people transferring their workplace or private pensions without receiving professional advice has increased by more than 50% over the past four years.

And over that time, the amount lost due to moving pensions to schemes with higher charges has jumped from £792million to £1.2billion in 2023.

Pension schemes charge fees every year to cover the costs of running the scheme, such as managing your investments and running the platform.

Many people switch pensions to move to a scheme charging lower fees.

But the shocking new research suggests thousands of customers have moved to pensions with higher charges than they had before – meaning they have lost out.

The People’s Pension’s research found that nearly three quarters of people who had transferred a defined contribution pension – where you build up a pot of money over time – in the past two years didn’t know what the fees were for their new pension.

It calculated that savers who transfer multiple low-charging workplace pensions into one higher-cost option could lose up to 20% of their pension by retirement.

This would mean they’d need to work at least three more years just to make up the cash they’ve lost to higher fees.

Patrick Heath-Lay, CEO of The People’s Partnership, said: “It’s incredibly worrying that our modelling shows more than a billion pounds is potentially lost due to people transferring to higher charging pension schemes.

“Given market activity around transfers is escalating, this could easily cost consumers billions a year more once pensions dashboards are introduced.

“We need to act now to ensure that people have the information they need to compare their options when considering a transfer.”     

What are pension charges?

Pension schemes levy charges from your pension savings every year to help with the running costs of the scheme.

For example, most pensions have an “annual management charge” which covers the cost of managing where your pension money is invested on your behalf, with the aim of growing your pot over time.

There may also be fund fees and platform fees to cover the cost of running the platform your pension is on and the running costs of the funds you invest in.

Some other fees include an inactivity fee, a contribution charge, exit fees, and consolidation fees.

The majority of firms charge between 0.25% and 1% in annual management charges.

These fees may sound tiny, but even a tiny percentage difference can make a huge impact on your pot size over time.

Fees are usually charged as a percentage of your whole pot.

So, if you had a pot worth £30,000, a 1% annual management fee would cost you £300.

Over just five years you would have paid £1,500 in fees.

For comparison, if you paid a lower fee of 0.25% you’d pay just £75. If you paid that for five years running, you’d have paid just £375 – £1,175 less.

Your pension should typically grow every year, though, so it is unlikely you’d pay the exact same annual fee – it is likely to increase over time.

These fees and charges often take people by surprise.

Indeed, The People’s Pension’s research found one in 10 (11%) workers didn’t think their pension had any fees or charges at all.

And previous research by digital wealth manager Moneyfarm found around half of UK workers weren’t aware they paid an annual management fee.

How can I avoid high pension charges?

Before switching your pension to a new scheme, find out what your current scheme charges and what the new scheme would charge.

Information about your fees should be in the paperwork related to your pension.

If you aren’t sure what your pension providers are charging, ask them for a breakdown – they should provide this to you.

Make sure the scheme you’re switching to has lower charges than you are currently paying, factoring in all of the different fees.

Rebecca O’Connor, director of public affairs at Pensionbee, explained: “Bear in mind that some pension providers charge percentage fees (the majority) and some charge flat rate fees.

“So, you might need to convert a % fee into pounds and pence based on your total pot size, or vice versa to do a proper comparison between what you are paying now and what you would be paying if you moved.”

How do I consolidate my pension?

One way to avoid hefty pension fees is to consolidate your pensions into one low-charging scheme.

Consolidating your pension is a fairly straightforward process.

The most time-consuming part, if you have multiple pensions, could be tracking down your old pots.

There are several services that can help you if you can’t remember what pensions you have or where they are there are.

For example, the government has a Pension Tracing Service online or you can call 0800 731 0193 for help.

Pension provider AJ Bell also has a service to locate old pension pots – visit its website to get started.

You can also try ringing your old employers’ HR departments to ask for the details of your scheme.

Once you have tracked down your pensions, ask each provider how much you have saved and what charges you are paying.

Once you have located all of your pots the hard work is done and your newly chosen pensions provider should do the rest of the work for you.

There are some things to consider before consolidating your pensions, such as whether you might be giving up any benefits by switching out of a scheme.

Ian Cook, chartered financial planner at Quilter, explained: “Some pensions may offer an earlier age you can begin taking withdrawals or offer guaranteed annuity rates. 

“If you transfer out of these, you will lose these benefits and as such they need to be weighed up.”