If you opened a defined contribution (DC) pension in the 1990s or 2000s, the charges you’re paying could be higher than comparable pensions opened more recently. Between now and your retirement, the difference could add up to thousands of pounds explains Andy Knight, Chartered Financial Planner at Pembroke Financial Services.
Research conducted by the Institute for Fiscal Studies found that many older DC pensions deliver “poor value for money”. Among people in their 50s, the average annual fee for a DC pension taken out in the 1990s is above 1.1%. This compares to a charge of 0.8% for DC pensions opened in the last decade.
Andy said: “The difference between 1.1% and 0.8% can seem small. However, over the decades your pension will be invested, it can add up.
“For example, a 50-year-old with a pension worth £21,000 could have an additional £2,400 at the age of 67 if they switched from a pension charging 1.1% to one with a 0.8% fee. This example assumes that annual investment returns in the future are the same as the average over the last five years.”
The larger your pension, the more you could gain by switching.
The research assessed the returns of different pensions too. It found that the higher fees of older pensions are not justified by better performance in many cases. So, if you do have an older DC pension, moving your retirement savings to another scheme could make sense.
Kate Ogden, a research economist at the Institute for Fiscal Studies, said: “It is vital that people get the most out of the retirement saving they have done over their working lives. This won’t happen automatically. Older pensions risk becoming poor value for money. The fee charges are often higher than those on pensions taken out more recently.”
In addition to potentially higher charges, older DC pensions may not be invested in the way you’d like. Asset allocation decisions you made many years ago may no longer suit your retirement plans.
Your pension should reflect your investment risk profile and other factors, like when you plan to retire.
Even if you’re no longer contributing to a pension, it’s important to continue to assess performance and engage with it to ensure it helps you reach your goals.
What value is your pension delivering?
Andy added: “If you took out a DC pension a long time ago, it’s likely delivering poor value for money in terms of charges. The research found four-fifths of pensions started in 2013 have a charge of 0.75% or less. In contrast, just 1 in 9 pensions opened in 1993 do.
“To determine the value of your pension, you should assess what fees you’re paying and compare this to alternatives available today. It could save you thousands of pounds, which can then be invested to boost your retirement savings.”
Charges are an important part of reviewing your pensions, but you shouldn’t automatically switch your pension if they are high. There may be other things that make the pension valuable, such as:
- Investment performance: You should review charges in the context of the pension’s performance. A higher charge may be justified if your retirement savings are growing at a faster pace.
- Greater flexibility: Some older pensions may allow you to access your savings sooner than newer pensions. If you want to retire early, this can provide you with more freedom.
- Guaranteed annuity rate (GAR): Some older pensions may have a GAR. Today’s annuity rates are typically lower than the 1990s and earlier, so you could receive a higher retirement income by retaining an older pension.
Before you make any decisions about your pension, you should carefully review it. Once you’ve left a scheme, you may not be able to go back, and you could lose any benefits you hold now. You may also need to pay an exit fee.
Transferring your pension
Andy concluded: “If you decide that a pension isn’t delivering value, you’ll need to find another pension scheme to move your savings to. This could be an existing pension or one with a different provider.
“There are a lot of pension providers to choose from. You should consider the fees of pension schemes as well as other factors, such as the choice of investment funds on offer and past performance, although you should remember that past performance is not a guarantee of future performance.
“Some providers may also have minimum or maximum contribution levels or require regular deposits.”
With so many providers to choose from, it can be difficult to know which option is right for you. If you have questions about your current pension or are thinking about switching, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.