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IS YOUR PENSION PAYING TOO MUCH IN CHARGES ?
by Sam Hulson of First Equitable
Research carried out by the Institute for Fiscal Studies ( IFS ) and funded by the Economic Research Council , found that people with older defined contribution ( DC ) pension schemes are at risk of losing thousands of pounds due to high charges and often these were not justified by better performance .
The data showed a gradual decline in fees over past 20 years and so people in their 50s were generally the worst impacted by the higher costs being paid . The IFS concluded that very few pensions taken out 20 years ago or more had low charges . The average fee for deferred pensions taken out in the 1990s was above 1.1 % of fund value which is considerably higher than the current DC charge cap of 0.75 % per annum .
What is the charge cap ?
The charge cap is a government-set limit and is the annual amount that can be charged to savers in default arrangements within DC pension schemes used for auto-enrolment . Default arrangements are the investment fund or funds that an employer or scheme trustee have chosen for members who haven ’ t actively made any investment choices .
The cap has applied since April 2015 and is currently set at 0.75 % per annum of funds under management within the default arrangement . The cap applies to all scheme administration and investment charges , excluding transaction costs . This means it doesn ’ t currently include costs that are incurred by the investment manager when assets are bought , sold or lent by the fund .
It is important to keep in mind that this is the charge ‘ cap ’ and so many modern schemes will have an offering which is considerably lower than this – particularly where passive funds are used which is common within default DC arrangements . For those that aren ’ t aware , a passive fund is an investment vehicle that tracks a market index or segment . For this reason , they are normally considerably cheaper than managed funds which require the fund manager to spend time researching and analysing opportunities to invest in . Certainly , paying 0.75 % per annum for a passive portfolio is something we would consider very expensive still .
The IFS warned that leaving such high charge pensions where they are meant savers would very likely be missing out on higher returns . For larger pots the difference between higher and lower charges could literally be measured in the tens of thousands by the time they come to retire .
Watch the risk profile
The research also found that older deferred pensions may not be invested in line with the correct risk profile . The consequences of this may be more precarious for people approaching retirement as they may find that they are invested in a much more volatile portfolio than they would otherwise be comfortable with ; or even deemed suitable , based on their capacity for loss and retirement income needs . Good financial planning should ideally see clients revisit their risk profile on an annual basis when approaching retirement . For those further away less frequent may be adequate , but still important not to neglect for years on end .
Would you benefit from a review ?
This research certainly rings true with our own experiences of analysing significant numbers of client pensions . Generally speaking , the longer a client has held a pension – or investment for that matter – the more likely we can help them make cost and performance improvements by moving to a newer offering .
Whilst reducing cost is one metric that can be easily compared , there are also potentially other key benefits that accessing a more modern scheme might provide . These will include the range of investment choices available and also what options are accessible to the member at retirement . In addition to being more expensive , many older schemes also have poorer investment outcomes and a lack of flexibility when it comes to retirement options ; for example , the choices at retirement may be limited to either an annuity purchase or full encashment . Given the vast majority of clients are making use of flexible drawdown nowadays ( the ability to choose how much you withdraw and when ), a transfer may ultimately be required anyway .
Navigating the pension landscape can be a confusing journey , particularly for the untrained eye . Getting advice can often really add value here as we can provide you with objective analysis and feedback as to how your plan compares to the market as a whole and the area or areas where you could enjoy improvements .
If you would like to learn how we can help , please get in touch . You can also email me at sam . hulson @ first-equitable . com
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