Members of workplace pension schemes lose about £1.7bn a year as they approach and enter retirement because savers choose expensive access points to their funds, according to new research from HSBC Tomorrow Master Trust.
The research was commissioned for a report Converting pension pots into retirement incomes: Are current roads delivering member value? by HSBC Tomorrow Master Trust and undertaken by Professor Andrew Clare of Bayes Business School, in association with Hymans Robertson.
The report focuses on the current issue of the majority of master trust, single employer, and contract plans in the UK not providing in-scheme retirement solutions, which compels members to go it alone and seek out third-party providers to
It found that many scheme members may be purchasing items that are not the best fit for their needs, even while some of this loss is caused by them withdrawing more than the 25 per cent tax-free lump payment, subjecting them to severe tax penalties.
Members of pension schemes who withdraw in order to receive retirement benefits typically transition from an accumulation phase governed by The Pensions Regulator to a retail phase governed by Financial Conduct Authority guidelines.
The report finds that members are exposed to risk such as pension scams and value erosion due to the lack of ownership from governing bodies, and are no longer covered by the fiduciary and value oversight responsibilities of employers and trustees.
According to estimates from HSBC Tomorrow Master Trust and Hymans Robertson based on Financial Conduct Authority (FCA) data, £1.7bn in pot value is lost annually as a result of a significant cohort of people acting in a less than ideal manner when using their pensions for the first time.
Bayes Business School Report author Professor of Asset Management Professor Andrew Clare says: “As members transition into retirement, current pathways can erode the real value of pension savings that took a lifetime to accumulate. And when schemes abandon them at this critical time in their lives, they are exposed to risks that they are often not equipped to face alone.”
HSBC Tomorrow Master Trust CEO Alison Hatcher says: “Pension savers need good value solutions that can fit into their lives and work for them. The friction, cost, and risk that members face as they enter retirement for the first time is a significant issue that is often forgotten or ignored. There is a major real-term impact that members are exposed to during this crucial moment in their lives and we need to find ways to fix and enhance value in this area.”
“Our vision is focused on innovation with an absolute commitment to serve the evolving needs of employers, pension savers and retired members. Part of that includes a joined-up financial wellbeing and pensions journey for members, including a holistic retirement savings and benefits platform which is digital but backed up by personalised support.”
Hymans Robertson partner Kathryn Fleming says: “The reality is, many individuals with small pots wanting to convert their plans into a regular income do not have sufficiently complex needs to warrant full adviser charging. Guidance or low-cost advice propositions in conjunction with the ability for individuals to leave their DC pots invested in cheap, well-governed employer-sponsored products are likely to lead to much better retirement outcomes for many individuals.”
