- Pensions Regulator chief executive Nausicaa Delfas warns employers choosing a workplace scheme based purely on cost may not deliver value-for-money for members (Mansion House Pensions Summit speech October 2023 | The Pensions Regulator)
- Delfas says employers and their advisers are choosing schemes based on “the easiest metric to quantify, cost”
- Cost is a key component of value but so too are investment returns
- Savers with multiple retirement pots built up through automatic enrolment can benefit from lower charges and greater investment choice by consolidating with a single provider
Tom Selby, head of retirement policy at AJ Bell, comments:
“The drive from government and regulators to get workplace pension schemes to consider more than just cost is clearly sensible. It is no good having an ultra-cheap pension if the investment performance is terrible and the service is rubbish. Cost is obviously a vital part of delivering a decent retirement income, but this needs to be combined with strong long-term returns.
“Policymakers undoubtedly have an eye on nudging big schemes in particular to ramp up their exposure to private equity as part of increasingly desperate efforts to boost investment in UK Plc. It is important any shift in investment approach is driven by delivering good member outcomes first and foremost, considering both the price of those investments and the realistic prospect of them delivering long-term returns.
“For individual savers, this is a reminder that workplace pension default funds are, by their very nature, not tailored to your particular risk preferences and retirement goals. Auto-enrolment is also creating a vast sea of lost pension pots, each potentially sat in a default fund that isn’t tailored to your needs.
“Anyone who wants to make administering their pensions simpler and create a more personal investment approach could benefit from consolidating their pots with a single, low-cost provider. Doing this should be relatively straightforward, particularly as firms, including AJ Bell, have tools which help you locate your old pensions.
“Once you’ve found those old pensions, you just need to provide a few details to your chosen provider, who will then do the legwork for you. Anyone considering transferring their pension, and particularly older style pensions, should check they won’t lose any valuable guarantees before switching. Your provider should be able to tell you if this is the case.”
Should you consider combining your pensions?
There are plenty of reasons why combining your pensions with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers.
You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.
Older pension schemes, for example, often charge more than modern pensions, while plenty of workplace schemes don’t offer a full range of retirement income options or restrict your investments to the firm’s own in-house funds.
Before transferring any old pensions, you should check there aren’t any valuable benefits attached which you may lose or exit charges that will be applied. Your provider should be able to tell you if this is the case.
The impact of reducing your pension charges can be significant, particularly over the long-term. For example, let’s take two people, Gemma and Chris, who each contribute £2,000 per year to their pension and enjoy 5% investment returns before charges. However, while Gemma pays just 0.5% in charges, Chris pays 1%.
After 30 years, Gemma could have a fund worth around £127,000, while Chris’ pot has grown to around £117,000 – a full £10,000 less.
If you do decide to consolidate with a single provider, assuming these are ‘defined contribution’ pensions – where you build up a pot of money which you can access from age 55 – the process should be relatively simple. Note that the minimum age you can access your pension is set to rise to 57 in 2028.
If you have a ‘defined benefit’ pension valued at £30,000 or more, you will need to take regulated financial advice before transferring. Where defined contribution savers build up a pot of money, defined benefit schemes provide an income for life from a set date, usually based on your salary and the number of years you have been a member of the scheme. Lots of providers will only accept a transfer from your defined benefit scheme where the adviser has recommended you do this.
You’ll just need to choose a provider with whom you want to consolidate your pensions and get the details of the pension or pensions you want to transfer over. Once you’ve given the relevant details to your new provider, they should do all the legwork for you.
You will then need to choose where to invest your pension. When doing this, make sure you are comfortable with the risks you are taking, have a diversified selection of investments and, crucially, keep your costs as low as possible.
Many firms offer a choice of diversified funds designed to meet different risk appetites if you aren’t confident choosing your own investments.
The Pension Tracing Service is a useful tool to locate missing pensions, and some providers also may be able help. AJ Bell, for example, has a pension ‘Pension finder’ service.
Hopefully, in the next few years, pensions dashboards will begin to be rolled out which should allow you to see all your pensions in one place, online – although implementation of these reforms has been delayed by the government.
