Advisers and providers have rejected claims pension fees can swallow up to 40% of cash invested by savers over the lifetime of a policy.
David Pitt-Watson, founder and chairman of Hermes Equity, suggested UK pensions charge unreasonably high fees, making them a bad deal for consumers, in a report published today.
However, industry experts disagree, arguing the pensions industry is very competitive and works to keep costs low for consumers.
In a submission to the Royal Society for the Encouragement of the Arts, Manufactures and Commerce (RSA), Pitt-Watson called for pension charges to be reduced to similar levels to private pensions in other parts of Europe.
He says the average pension obtained from an IFA charges an annual fee of 1.5%, compared with 0.7% for company-sponsored defined contribution schemes and 0.5% in Sweden or the Netherlands.
"A pension lasts 50 years," he explains. "So an average pound invested in the pension is there for 25 years. [A total of] 1.5% is paid in fees, on the balance of the fund every year. Twenty-five times 1.5% is 37.5%, or approximately 40%."
The RSA's report found many consumers were completely unaware of the charges, and none had calculated how much their pension would cost them over the lifetime of the product.
However, Kelly Wheble, an IFA at Positive Solutions, questions Pitt-Watson's figures.
"I'd be very interested to see how he got to an average annual cost of 1.5% per annum," Wheble says.
"Most standard funds with an average return have an annual charge of around 1%, while you can get a number of high return funds for just 1.2%. Unless most British investors are using unit trusts I'd doubt they are paying 1.5% in fees."
Wheble believes investors ultimately get what they pay for, and says price cuts would only be welcome if they did not impact on the returns a fund can offer.
Standard Life's senior pensions policy manager, Andrew Tully, says the UK market is very competitive, but says some providers continue to pay large up-front commissions to IFAs which could lead to added costs for consumers.
"There are still a few providers offering large commissions of up to 7%," he says.
"However, the FSA is aware of this and, following the RDR, we should see this become less of an issue as consumers can see exactly how much their advice is costing them."
Mike Morrison, pension strategy manager for AXA Winterthur, says costs can vary depending on product complexity, but thinks it is unlikely that most pension savers are paying 1.5% in fees.
"When Stakeholder pensions came along the industry moved to a 1% fee mindset, and while some funds cost more than 1%, other will cost less depending on returns and complexity," Morrison explains.
"UK pensions may cost a little more than in Europe, but I think we have a greater range of flexibility in UK pension products."
Morrison says the RDR should go some way to making all the costs of pensions, from tax wrappers through to advice, much clearer to the consumer and ensure they are not paying more than they need to.
Contact: John Bakie, Tel: 020 7484 9805, e-mail: [email protected]IFAonline
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