Pension Freedom May Cost 20% Of Your Savings


Pension freedom seems to have introduced more ways for providers and the government to snatch a profit at the expense of retirement savers.

The tax implications of drawing cash from a pension are trumpeted by pension providers, who obviously want to keep the funds inside their vaults so they can charge more money for administering funds.

In some cases, these tracker funds are not managed at all, but still attract fees of up to 1.5% of the fund value each year, which is a nice little earner for the providers.

Now, the news comes that if you want your pension cash to spend now and do not like the idea of paying fund management fees for nothing in return, then pension firms are charging fees of up to 20% of the value of a withdrawal – and that’s before tax is deducted.

Well, say the firms, it’s not all pensions just a few and not everyone pays up to 20%, as if that appeases the retirement saver who sees a hefty chunk of their nest egg disappear in tax and administration costs.

500,000 savers affected

The interesting question is exactly what extra work means a pension provider can take 20% from withdrawals from one fund, but nothing or as low as 1% from another?

About 500,000 pensions could pay the 20% surrender fees.

Aviva, the Britain’s biggest pensions firm is prevaricating over the numbers, along with Aegon, Legal and General and Canada Life.

They declined to give an exact number of how many savers are affected, but suggested the high fees relate mostly to old pensions and annuities.

Other pension providers were more forthcoming:

  • Standard Life reckons around 156,000 policies include penalties. That’s 7% of all policies but the proportion is higher for the over 55s. The average surrender fee is 1% of the fund.
  • Zurich said 50,000 pensions have an average 5% of fund value penalty.
  • Old Mutual has almost 7,000 pensions with a surrender charge of no more than £1,000 in most cases.
  • Phoenix and Scottish Widows refused to give numbers but agreed a percentage of their pension books come with surrender penalties

How much will you pay?

To find out if your pension comes with early surrender penalties, write or call the provider and ask two questions –

  • What is the current value of the pension fund?
  • What is the transfer value of the pension?

Take the second from the first, and this will give the value of any surrender charges.