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Savers risk losing thousands with pensions that deliver poor value

Savers risk losing thousands with pensions that deliver poor value
For a 50-year-old saver with a pot of £21,000, the difference in fees would cost them £2,400 at age 67. Photo: Getty

Savers could lose thousands of pounds if they fail to transfer their old pensions to newer schemes that offer better value for money, new research shows.

Many older deferred pensions are in schemes with charges that are high compared to today’s market offering. In the long term, that difference could cost a saver £2,400 or more, according to research, funded by the Economic and Social Research Council and published by the Institute for Fiscal Studies (IFS).

The average annual fee for deferred pensions taken out in the 1990s is above 1.1% of fund value, compared with around 0.9% for pensions taken out in the 2000s and 0.8% for pensions taken out in the 2010s.

While the difference between 1.1% and 0.8% might seem small, it can be equivalent to thousands in the long term. For example, for a 50-year-old with a pot of £21,000, it would amount to a difference of around £2,400 at age 67 in today’s prices if annual investment returns going forwards are the same as the average over the past five years, the report showed.

Watch: Is a UK state pension enough to survive on in retirement?

Read more: State pension age changes keep thousands more in paid work

Very few pensions taken out a long time ago have low charges — four-fifths of the pensions started in 2013 have a charge of 0.75% or less, compared with just one in four of the pensions started in 2003 and one in nine of the pensions started in 1993.

“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," Kate Ogden, a research economist at IFS and one of the authors of the report, said.

"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."

However, "greater individual engagement will never completely fix this issue", Ogden said. She called on policymakers to "consider wider initiatives to encourage value for money in older pensions”.

Read more: Majority of Brits won’t be able to save in 2022 due to higher bills

The research examined novel data from online company Profile Pensions, on the deferred defined contribution pensions held by a large sample of its potential customers.

The Department for Work and Pensions (DWP) has launched a consultation on the draft regulations for the introduction of pensions dashboards.

The regulations will make provision for the requirements that will need to be met by pensions dashboards and their providers, and the trustees and managers of relevant occupational pension schemes.

“It’s been five years since the government first committed to introducing pensions dashboards, so it's encouraging that their introduction is moving a step closer with this consultation," Jenny Ross, Which? money editor, said.

“Dashboards should help millions of people to keep track of their savings and plan for retirement, and it's right that state pension data will be included from the start.

“Pension schemes must move quickly and ensure they are ready to provide the information that people expect and need on a dashboard without further delay, as some consumers have struggled for too long with a complex, fragmented pensions system.”

The pensions dashboard is designed to bring together information on all pension pots held by an individual, including information on costs and charges, as well as information on how much is in each old pension and the names of their providers.

Watch: When should I start paying into a pension?