Today’s video is based on a recent report by the Institute of Fiscal Studies. This report suggest thousands of individuals are losing vast sums of money by not fully understanding their pension. Some older schemes have high fees, and the costs of not switching to a newer one can be significant.

You can watcdh the video below or alternatively, you can ead the content as a transcript.

Please note: not all older pension schemes carry higher fees than newer alternatives. This article reflects information relating to a published article, from a reliable source on a specific topic.

The importance of understanding your pension

This week saw the publication of a very interesting report by the Institute of Fiscal Studies (IFS). 

It hasn’t been widely reported on in the news, but I think it’s worth hearing about so I’m going to tell you all about it.

It’s important to understand that the IFS is an independent research institute.

This study hasn’t been commissioned by a pension provider or anyone with a vested interest – it was actually funded by the UK’s Economic and Social Research Council.

This report states that people in the UK are losing thousands of pounds every year by not transferring old pensions to newer contracts with lower charges.

What does the report say?

We come across this a lot when taking on new clients.

We find people who have benefits in old workplace schemes or people who contracted-out of SEPRS or the state second pension back in the day and they haven’t looked at these old schemes in years. 

When we analyse the contracts and do a whole of market comparison the differences between what people have and what they could have, can occasionally be quite shocking.

What are the details?

This independent report found that the average annual fee on deferred pensions taken out in the 1990s is 1.1%.  

In the 2000s this dropped to an average of  0.9% and only 0.8% on pensions taken out between 2010 and 2020.

This might not sound like a lot but it’s another example of what seems like a small difference having a massive impact over the longer term.

An example in practice

Let’s look at an example of someone currently aged 50, planning for retirement at their State Pension Age of 67. 

Let’s assume they currently have £50,000 in their pension and it’s going to grow at 5% a year before charges (bear in mind as always that investment returns are not guaranteed, and fund values can go down as well as up).

A contract with an annual charge of 1.1%, 90’s style, would give them a fund of £95,815 at state pension age.

A contract identical in every way but with an annual charge of 0.8% – 2010’s style – would give them a fund at state pension age of £100,628.

That’s a massive difference.

An extra £5,000 on a fund that’s only worth £50k in the first place. 

A full 10% of additional growth just because they reviewed the contract when they were 50.

Now please don’t think I’m saying everyone with an old pension contract should transfer it to a newer one – I categorically am not.  What I am saying is you should take financial advice and put yourself in an informed position.

Not all older pension contracts are more expensive

According to the IFS report, one in five pensions started in 2013 had an annual charge of more than 0.75% compared to eight out of every nine back in 1993.  While that’s a stark comparison it does show us that one in nine pensions back in the day was fairly low cost.

The reverse is also true – not every modern pension offers good value. 

Don’t just look at the costs

But also, there’s more to this equation than just costs. 

For example, it’s far more common in older contracts to come across guarantees – guaranteed growth rates, guaranteed annuity rates, guaranteed minimum pensions.  These are valuable benefits and should not be given up lightly.

On the other hand, a lot of older contracts don’t offer things like flexible access and the death benefits can be far more restrictive. 

I heard a story recently from a local solicitor where a widow was forced to receive the entirety of her late husband’s pension fund as a single lump sum, which she didn’t especially want and which increase the inheritance tax liability on her estate by hundreds of thousands of pounds.  If only her husband had reviewed his pension before he’d died this could have been avoided so easily.

The importance of financial planning

What all of this highlights more than anything is the importance of financial planning. Furthermore, it’s about asking yourself the right questions.

For example:

  • Do you know what the charges are on all of your pensions? 
  • Do you know if you have any guarantees and if so what they do? 
  • Do you know what benefits would be paid out if you died tomorrow and who they’d be paid to?

If you can’t answer yes to all those questions take independent financial advice, put yourself in an informed position and plan ahead.

Note: This article doesn’t constitute financial advice. Your capital is at risk when investing in equity markets. Past performance is not a guide to future returns.  Investments can go down as well as up and you could get back less than you originally invest.