Economists have stressed that the collapse of final salary schemes will reduce millions of Brits' pensions by up to a staggering 75%
People who have spent years of their working life planning and saving for retirement will see their retirement income reduced by a minimum of 20%, and up to 75% - According to Civitas this is caused by the risky nature of money purchase plans and “rip-off” financial advisers.
In a report, it says that “anti-consumer practices” had spelt “tragedy” for British savers, adding: “Despite conscientiously saving during their working years, millions of Britons will be far worse off in retirement than they should be.”
It adds: “Management charges cut into the value of the pension pot as it grows. At the end, retirees usually have to purchase an annuity, which knocks off yet more value, often between 10 and 15 per cent of their savings.”
It states that impacting this problem is that pension providers do not have to be up-front about these costs and their implications for final earnings, quite frequently hiding the most revealing measures of the costs of fund management in the small print.
“While rarely illegal, these practices are unscrupulous and display an attitude which would be scandalous amongst those who advise on other important life decisions.”
They added that the UK has a “problem of extraordinary low personal retirement savings."
Extensively accepted as the overriding pension choice for workers across the nation, final salary schemes were highly rated, but most employer have now ceased offering them as many people now have money purchase schemes as an alternative.
The news comes at a time where there’s already a major pensions crisis and experts agree that the country is facing a ticking time-bomb as not enough people have save enough money.
According to the Civitas report, titled You’re On Your Own, pension providers have been exploiting customers by not being up-front about the costs of certain plans.
Fund managers can charge what appears to be a small fee by defining it as a percentage of the retirement pot, but as the pension increases, so do the costs.
A typical 1.5 per cent management charge would cost just £15 in the year that a scheme is opened, but by its 40th year, it will have soared to £3,000, leaving pension holders “ripped off a bit at a time so they wouldn’t notice”.
These costs are often hidden in the small print, with workers unaware of how high they will get.
Financial advisers are also regularly recommending “deceptively expensive” schemes which deliver poor results for the investor, the report says.
But the pensions market is so complex that workers find it hard to compare deals between different providers and so turn to advisers for help.
Money purchase schemes are also far riskier than final salary plans, where the employee is guaranteed a fixed income every year from retirement.
This was typically between a third and half of their last wage and could be built up to two-thirds.
It meant people knew exactly what they would get in their older age.
But most of the current schemes require an employee to pay into a fund which is then invested, usually in the stock market.
On retirement, it is used to buy an annuity, which provides the pensioner an income for the rest of their lives.
This means that the amount of money they will get is unpredictable and will depend on how the stock market and their investments fare.
Last month, more than £62billion was wiped off the value of the FTSE 100 leading companies, which is where most such pensions are invested, in just one day.
With the economy still unstable and fears of a double-dip recession high, pension funds could yet take a further battering and the stock market could crash again.
