Beware the hidden costs of paying into pension schemes

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The largest push ever to join a pension starts this month as the Government insists all employees sign up unless they positively opt out.

Such retirement planning is to be welcomed particularly since the numbers going into workplace pensions has fallen to the lowest level since records began in 1953.

Yet millions in and out of a pension scheme may be dismayed to discover that providers will not reveal the true costs of such provision.

Clearly, pension providers have a cabal that has agreed to keep secret the actual fees and expenses in managing a pension.The trading costs in buying and selling the component costs of a pension are concealed.

They neither form part of the annual management fee or, more surprisingly, the ‘total equivalent charge’ quoted by providers. The main hidden costs are stockbroker fees on purchasing and selling stocks and shares, the transaction spread and stamp duty.

Traditionally, insurers have defended their action by saying such expenses vary from year to year but that is no excuse to not reveal them historically and to give a good current estimate. Past performance is a major reason for selecting a provider and such trading costs are a drag on results.

For someone paying a monthly £500 into a pension for 30 years, assuming trading expenses of 0.3 per cent and six per cent growth, a staggering £24,000 would be secretly deducted, according to advisers Hargreaves Lansdown.

Reluctantly, the Association of British Insurers has finally announced it will produce a model schedule of fees to reflect handling costs. It has said to both the FSA and Pensions Regulator that it would like to see pension savers informed in a “consistent and simple” way about management costs.

It should not have taken this push to enlist far more into pensions to have secured this afterthought. If true transparency from each pension provider is not evident soon, the Pensions Minister needs to step in and legislate.

Again, insurers need to hang their heads in shame.

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