/ Money

Could charges cut your pension by 25%?

Different-sized jars of cash

As of next year, employees will be automatically enrolled into a pension in a bid to encourage more people to save more money for their retirement. But could a lack of rules threaten the benefits of auto enrolment?

Research out today by Scottish Widows shows that almost half of us aren’t saving enough for a decent retirement.

This, of course, is hardly news. Auto enrolment should improve these statistics, but only if the schemes don’t come with unreasonable charges.

Why can’t all schemes live up to NEST?

One of the options open to employers under auto enrolment is a new savings scheme called NEST (National Employment savings Trust). NEST is a simple, not-for-profit low-cost pension scheme designed to give its members an easy way of building up their retirement pot.

It is a ‘trust based scheme’ which means the trustees have a duty to work in the best interests of its members and here at Which? we’re really happy that it’s come about.

But we’re not quite cracking open the champagne just yet. Employers can choose schemes other than NEST, and there’s nothing stopping a disengaged employer choosing an inappropriate pension scheme that is not right for their employees.

We have argued long and hard for decent quality standards because currently there aren’t any, which means there’s nothing to ensure charges are low or that employees are protected. Plus, giving advice to employers about pension schemes is not a regulated activity, which means the adviser may not even be regulated by the FSA.

Don’t get stuck in an expensive scheme

Employers are more likely to ensure that charges are kept down for their existing employees and not for people who leave – and often this leads to past employees paying higher charges. So past employees could be stuck in an unsuitable, expensive scheme.

Imagine that you’d been working hard for 10 years through your 20s and build up a pension pot of £30,000 by the time you were aged 35. If your annual management charge increases by 1% (which sounds low, doesn’t it?) then by the time you retire your accumulated pension could drop dramatically. Instead of receiving a pot of £112,000, you’d actually receive £84,000, which would mean missing out on a massive £28,000 (25%) than if you were in a good value scheme.

Basically, the higher the charges, the more you will need to pay in from your monthly pay packet to get an adequate pension.

Yes, we support auto enrolment, but without proper quality controls there’s a higher chance of the system being abused – and an increased chance that people will end up in unsuitable schemes.

Did you know about the new auto-enrolment scheme and have you ever considered the impact of the charges on your pension pot?

Are you baffled by state pensions or Sipps? Are you worried about being able save enough for your retirement? Whatever your pension questions, Which? experts will be on hand to answer them during our live Q&A on Friday 1 July. Sign up now to take part in this exclusive event for members, or log on at 12.30pm on the day to get involved.

evie says:
10 June 2011

In theory this is a good idea – everyone pays into a pension, which ultimately reduces the cost to the Treasury in terms of additional benefits. However I suspect that the main reasons why people are not currently contributing are not only apathy, but also suspicion – how may people have been paying into personal pensions which have actually lost money? And the big barrier of course is affordability – for those of us on below average earnings, with no employer contributions, the amount we can actually manage to spare each month results in a pathetically small pension pot, and for a great many people the need for money is now rather than at some dim point in the future. Would those on £50k plus be so keen on pensions if their earnings were reduced by more than half?