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Rip-off fees will wipe 27pc off new 'flexible' pensions, savers told

Warning issued over fees on the new 'flexible' retirement plans available under the pension reforms next April

Robbed by the pensions industry, you'll feel the pain for years: some insurance companies make an estimated 20 per cent profit margin, perhaps more, by lifting vast sums directly from pensioners’ life savings.
Savers face a labyrinth of charges under the type of retirement policies that will be offered next April Credit: Photo: Getty Images

Savers who take advantage of new flexible pensions next year face losing more than a quarter of their money to charges, research has found, prompting a new inquiry into rip-off fees.

From next April, the over-55s will have full discretion over the use of retirement funds, taking as much as often as they like.

George Osborne, the Chancellor, has said savers will longer need to buy annuities, after an official study found thousands of older people were being short-changed.

But a report raises concern that savers face a new rip-off from the type of pensions to be used under the reforms.

Professor David Blake, an academic at Cass Business School, will call on pension companies to declare how much they plan to charge savers who regularly make impromptu withdrawals.

"If people think annuities were poor value, that could be nothing compared to the cost of flexible pension plans next April," he said.

"Sensible people who are trying to make their pension last are the most at risk from high charges, as over a 20-year horizon, large sums could be removed from their funds."

The type of retirement plans pension companies have said they will offer next April are called "flexible drawdown" policies.

Research by The Telegraph found firms would typically charge more than £300 to set up this type of plan, where the money stayed invested in the stock market as customers made withdrawals.

Savers faced £400 a year in administration fees, with some companies intending to charge £30 for every "unplanned" withdrawal.

Customers would also lose around one per cent of their fund each year to investment management fees.

As a result, the plans would work out relatively costly for savers with smaller or subsidiary pension pots.

Figures calculated by the House of Commons Library, an impartial research service for MPs, found charges would wipe 27 per cent off the typical fund invested in the plans throughout retirement.

The data was requested by the Labour Party, which has asked Prof Blake to undertake further investigative work. The House of Commons Library said its calculations corresponded to someone with a pot worth £30,000.

Experts urged savers who planned to use their pensions flexibly from next April to "shop around" for the best deals.

Alan Higham, director of pension company Fidelity, said: "Savers will need to be extremely careful because it will be difficult to spot bad value on these type of "bank account" products, as there are hundreds of different charges to compare."

The Pensions Institute at Cass Business school is undertaking its Independent Review of Retirement Income to establish how to increase the size of personal pensions in Britain.

Prof Blake said: "We are trying to identify some of the risks that savers face in securing a decent retirement, and the fees are part of that."

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