The Sunday Times reported a £300m raid on workplace pensions recently. Immediate thoughts were this must be another article about final salary pension schemes, but on this occasion it wasn’t.
As final salary pension schemes dwindle more attention is being focused on its replacement – money purchase pension plans. The Sunday Times (15/09/13) was reporting on the costs of money purchase schemes and the impact costs have on your retirement fund. They were particularly focusing on the unfair higher charges paid up members (those that have stopped paying in) are forced to pay. According to Hymans Robertson it’s common for annual management charges to more than double from about 0.4% to 1% when an employee stops paying in. Where I believe a greater problem exists is when a former employee, perhaps someone who has moved jobs, leaves their pension with their old company and is hit by increased costs. Even today historic paid up pension plans can have higher charges than newer pension plans. But what does this mean in terms of a retirement pot at age 65?
Hymans’ research analysed the impact of a 0.6% additional charge on a pension pot of £35,000 – the average saved in a workplace scheme. It calculated someone who stays in their job (or retains a lower charges by transferring) picks up a 30% higher pension. Over 30 years the £35,000 pension pot grows to £99,130 whereas the leaver picks up £76,893. This will cut from £6,100 to £4,730 the annuity bought at 65.
The damage escalates along with the amount of savings. A £100,000 pension pot would be worth only £219,694 at retirement, rather than £283,230, cutting the available pension by £3,910 from £17,420 to £13,510.
Clearly it pays to review your pension plan charges. For more information call Christopher Little & Co on 01943 851080 and improve your retirement fund.