Unfair Pension Scheme Charges

McBiker

Will unfair pension scheme charges/fees be dealt with in the same as as unfair banking charges? I have a paid up EPP that charges extra for the fact that I no longer pay into it, as my company closed down. This seems like a fee for doing less work, just to ensure that they get the total fees that they expected over the life of the fund. I thought I was basically locked into the scheme as the transfer fees are extortionate, sometime as high as 39% of a particular plan. The overall pension transfer fee is 4% of the total fund. I now know after more careful reading of the charges, that I will lose 4% of the total fund at the point of retirement anyway, so this 4% charge will be levied whether I transfer out, or remain with the scheme until retirement. Is anyone else in this situation, and can anything be done about it? Small claims court maybe?

dunstonh

Will unfair pension scheme charges/fees be dealt with in the same as as unfair banking charges?

You mean in the same way that the banks won and charges are no longer considered unfair (in the eyes of the law)?

No. The two things are very different.

I have a paid up EPP that charges extra for the fact that I no longer pay into it, as my company closed down.

EPPs have greater administration levels compared to personal pensions. Some plans are priced on getting their earnings over a period based on a certain amount. When you break the contract by making it paid up, the insurer still has to recover its costs.

I thought I was basically locked into the scheme as the transfer fees are extortionate, sometime as high as 39% of a particular plan.

Some plans do what appear to be high transfer values but frequently can be easily explained away. e.g. adding in a basic sum assured the start which is included on the current value. Or having an enhanced initial investment that has a clawback if you transfer before a certain date.

The overall pension transfer fee is 4% of the total fund. I now know after more careful reading of the charges, that I will lose 4% of the total fund at the point of retirement anyway, so this 4% charge will be levied whether I transfer out, or remain with the scheme until retirement.

4% does not sound unreasonable at all.

Is anyone else in this situation, and can anything be done about it?

There are some rare plans which many would consider unreasonable on charging but 4% does not seem at all unreasonable. There is little you can do about it.

Small claims court maybe?

On what basis would you do that?

xylophone

http://www.pension-transfer-advice.com/html/article.php/zcid/2245/type/article/finance/Executive_Pension_Transfer
might be worth a look?

McBiker

Thanks for the reply.
I was testing the waters on what peoples thoughts were on this subject.
I started my EPP when I was contracting as a Limited Company, and I expected the charges to be much the same as I now see on the occupational pension scheme I have within my now permanent position. I see the EPP as the providing a pension for employees. In this case myself and my wife. I think that this problem with so called "change deduction" charges has already been addressed:
See the Motley Fool site under the board, "Pensions - motivation and policy", entry by jdey (number 8324)

I was hoping to see some other cases of action taken on EPP charges. I would like to transfer my fund to another with more reasonable charges, and I would prefer to not to lose any of the fund amount because of transfering.

McBiker

Thank Xylophone, I will take a close look at that site.
I expect that my best alternative is to transfer to something with more reasonable charges, that performs as well if not better.

dunstonh

Have you checked your tax free cash entitlement before your consider transferring?

You would lose the non-standard tax free cash amount on transfer.

McBiker

You are correct in that I will have the capability to extract a larger tax free cash sum. The link that xylophone provided shows that I can transfer out to another EPP with lower charges and still retain my tax free cash entitlement. I need to look further into this, to see if that is the case. I also do not want to then be hit by a further large fee for the transfer. I know making a provider change is going to cost in some way, I just want to minimise it.

By the way, my plans are also being hit by management charges up to 6% on some of the plans.

I understand that the running of a pension scheme must be paid for, I just need to ensure that I am paying a fair amount, like for like.

dunstonh

If you transferred to a PPP/SHP or SIPP you would lose the entitlement. EPPs are not common nowadays and as such, do not benefit from the economies of scale that a mass marketed product gets. So, finding a cheap option may not be easy.

By the way, my plans are also being hit by management charges up to 6% on some of the plans.

That is highly unlikely. Most are around 0.3% to 1.5%p.a.. Typically no more than 2.5% p.a.. 6% is way off that and I have never seen one that high (apart from perhaps where there are capital and accumulation units where one segment suffers higher charges - although the other tends to have lower than average charges and you need to average them out)

McBiker

I was told about the 6% charges by an IFA when I previously looked at transferring out into my occupational pension. As you say, I think this was on accumulation units.

It is very difficult to determine the best course of action, as a higher tax free sum would be useful for future flexibility, if the charges do not hurt too much. The IFA I spoke to about transferring indicated that I could take about 75%, but that does seem optimistic. He also discouraged transfer as the loss due to transfer amount was high, but he obviously missed the fact that I would pay the same amount on completion at retirement (4%). The charges just look high compared to my occupational pension which has no transfer fee or fee on retirement, just management charges (from what I can see).

Your information has been very useful in terms of what I should be expecting.

dunstonh

is very difficult to determine the best course of action, as a higher tax free sum would be useful for future flexibility, if the charges do not hurt too much.

If the charges are linked to capital and accumulation units then they are going to be paid whether you stay or go. That was largely the point of that particular charging method. So, you then have to look at three things (in no particular order)

1 - can the alternative offer lower charges and recoup any difference before the end of the term
2 - are the benefits worth paying for (GARs, GMP, increased tax free cash etc. The latter applying here)
3 - are you switching to different types of investment that truly offer better potential or is it much the same as before (not uncommon for people to move from one investment to another that is virtually identical in processes and potential thinking that the new one will be better)

The IFA I spoke to about transferring indicated that I could take about 75%, but that does seem optimistic.

The lump sum could be that high. It doesnt have the 25% rule (although that is the effective minimum). There is a calculation made to determine it. So, if the figures are available to the IFA, he would have been able to calculate it.

He also discouraged transfer as the loss due to transfer amount was high, but he obviously missed the fact that I would pay the same amount on completion at retirement (4%).

To be honest, I would largely be inclined to keep a pension that had 75% tax free lump sum. no income tax, capital gains tax, tax relief going in and 75% of it payable tax free when you want it in retirement. That is quite valuable.

That said, the IFA would also have run a cost comparison against modern alternatives. If the difference is very small, then the cost benefit of 75% is worth it. If the cost comparison shows a big difference then the cost of that benefit starts to erode. How much value is put on that benefit will vary amongst different people. The regulator and ombudsman would consider a 75% tax free cash a very valuable benefit. So, unless you have some pretty good reasons to still transfer, I would imagine most IFAs would say keep it.

McBiker

Thanks dunstonh for all the advise.

It looks like the deciding factor is probably the tax free sum available under this scheme. As I could potentially take advantage of this in 3 years time, I would hope that the fund will not suffer too much from units eaten away, with hopefully increasing unit price to offset this.

Your replies are much appreciated.