People with old DC pensions paying higher annual fees could lose out on an estimated 4.4 per cent increase to their retirement fund if they do not move to a newer pension with lower charges and better investment performance, according to research from the IFS.
The IFS report found that many people in their 50s have deferred pensions in schemes with high charges by current market standards. Out of 28,000 DC pensions from a period between 2018 and 2020 analysed in the report, 28 per cent had fees of more than 1.0 per cent, 38 per cent had charges of 1.0 per cent, 34 per cent charged less than 1.0 per cent and 22 per cent charged 0.75 per cent or less.
The research also calculated that the difference in annual fees between 0.75 per cent and 1.0 per cent of funds has a significant impact when compounded over a long period of time. Assuming an annual investment return of 7.7 per cent, changing to a fund with a charge of 0.75 per cent for a 50-year-old with a pot of £21,000 would grow to £2,000 more than one charging 1.0 per cent by the age of 67.
IFS research economist Kate Ogden says: “It is vital that people get the most out of the retirement savings they have done over their working lives. This won’t happen automatically. Older personal pensions risk becoming poor value for money. The fees charged are often higher than those on pensions taken out more recently.
“In addition, how they are invested can become less appropriate as individual circumstances change. Many would benefit from taking active decisions over their past pensions, and this needs to be made easier to do. But greater individual engagement will never completely fix this issue, and policymakers need to consider wider initiatives to encourage value for money in older pensions.”
Profile Pensions CEO Jordan Mayo says: “This important research by the Institute of Fiscal Studies, using data from Profile Pensions, shows the importance of making pension and investment advice more accessible and affordable. Our technology is making this happen; now everyone can quickly and easily get whole-of-market investment advice online, discuss it with an adviser if they want to, with no upfront fees and low ongoing costs.”
B&CE, provider of The People’s Pension director of policy Phil Brown says: “On the whole, retail schemes which sit outside of the charging cap charge their customers more than auto-enrolment schemes – as recent research from The Pension Policy Institute shows. If we consider that a quarter of pension savers don’t even know they pay charges on their pension, this seriously risks savers making the wrong decision for them, and potentially losing out on thousands of pounds over a lifetime of saving.
“It’s vital that savers have easily comparable information when looking to transfer pension savings which is why the proposed value for money framework must include workplace and retail pensions, to enable savers to make the right choice for them.”