Government plans to increase the pension fees cap would force people to work five years longer as new, higher fees would eat into investment returns.
The Government is considering relaxing the 0.75pc fee cap, which it hopes will raise funds for its so-called "levelling up" agenda.
However, any change could have a major impact on retirement plans. Based on reaching a typical retirement pot of £305,000 by age 66, the amount required to generate £19,000 a year including the state pension, savers would have to work five more years if fees rose from 0.75pc to 1.5pc, according to XPS Pensions Group, a consultancy.
If fees rose to 1pc this would mean an extra year working, while a 2pc fee would mean nine more years of work.
This is based on the assumption that a saver invests £200 a month from age 21, with investment returns of 5pc a year.
Set to be announced in the Autumn Budget later this month, the new rules would be designed to allow pension funds to invest in “illiquid” assets, such as private equity and venture capital funds, where fees are greater but returns can be higher than public markets.
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Private equity funds typically charge fees of between 1.5pc and 2pc, before performance fees are taken into account. The Government believes this move would stimulate investment in the North and Midlands.
Simeon Willis, of XPS Pensions, said higher charges would eat into returns, although "illiquid" assets tended to perform better than publicly traded stocks, even after fees were taken into account.
“Illiquid assets have the ability to generate meaningful, positive returns, even after fees on a long-term basis. They also give a portfolio diversification as they perform differently to other investments,” he said.
However, Mr Willis said the problem with adding private equity or venture capital funds to pension accounts was that they could not be traded daily, which was often perceived to be important for defined contribution pension schemes.
“While the possible removal of performance fees is a welcome step and enables defined contribution schemes greater flexibility, daily dealing concerns mean the plans are unlikely to be transformational,” he said.
The Department for Work and Pensions last year found that the average charge was 0.48pc, although smaller pension schemes have much higher fees.
Two-thirds of providers said they had no hard-to-sell investments in their default funds, while one-third had a small proportion, typically between 1.5pc and 7pc.
“The main barriers to investing in illiquids are related to the high costs associated with these investments, with the unpredictability of charges also a concern,” the DWP said. The department declined to comment on whether the pension fees cap would be raised.
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