Defined-contribution pensions fees rip-off

Millions of pensioners will have their retirement income stripped of much of its value because of pitfalls in Defined Contribution (DC) schemes, according to the Civitas think tank.

A report, You’re on your own, says the collapse of defined benefit (DB) pensions, which guarantee savers a defined annual income, has meant less saving but also allowed “anti-consumer practices” to emerge. This makes it all the more important for those taking decisions about DC schemes to examine the “small print”, and for those who still have better DB schemes to hang on to them if they can.

A key problem identified in the report is that DC pension providers exploit a “blind spot”, allowing fund managers to charge what looks like a small fee by defining it as a percentage of a growing pension pot. They give the example of a typical 1.5% management charge that costs just £15 in the year a pension scheme is opened, but £3,000 in its 40th year. “Through compound charges, a typical pension can lose a third of its value as a result of what looks like a small charge at first”.