Life company pensions vs platforms: how it could pay to shop around

by Jemma Jackson from interactive investor |

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Workers could be tens of thousands of pounds better off by switching to a low-cost platform.

  • Comparisons show some pension savers are potentially paying tens of thousands of pounds more over a working life if using life company pensions 
  • When the impact of reinvesting the savings is calculated the numbers become “eye-watering”

Comparisons commissioned by interactive investor, the UK’s second largest direct to consumer investment platform, have lifted the lid on the potential cost of life company pensions over a working life and shown workers could be tens of thousands better off by switching to a low-cost platform. 

The calculations compare pension costs for Britain’s leading specialist investment platforms with those for traditional life companies like Aviva, Scottish Widows and Standard Life.

One of the most telling aspects of this research is that investment platform and life company pension admin costs aren’t always all that different: with the exception of flat fee providers like interactive investor, they all tend to wallop you with percentage fees which hurt you more as your pension pot increases over time. 

The comparisons look at the example of a 38-year-old with an accumulated pension pot of £100,000* contributing £10,000 a year into their pension, invested in funds, for the following 30 years and retiring at 68. 

They compare the impact of costs on the portfolio value at retirement, with a difference of almost £100,000 between the most expensive life company pension and interactive investor. Looking at more modern platforms, the biggest saving would come from switching to interactive investor from ii’s largest competitor, with a cost saving of £63,300 over 30 years (see table).

Whilst switching between investment platforms is straightforward, when it comes to the savings to be had from switching from a life company pension, Moira O’Neill, Head of Personal Finance, interactive investor, cautions: 

“Everyone’s individual portfolios and circumstances will be different so it’s important to remember that these scenarios are a guide only. Our comparisons assume life company customers are engaged investors that have chosen not to go into lower cost passive funds. 

“Even so, if you have your workplace pension with one of these life companies, you might well find that you are better off staying put. For one thing, the charges on workplace pensions are usually considerably lower than the assumptions made here, and most importantly you might lose your employer’s pension contribution, which is too valuable to jeopardise – so you should always check this. But if you are an engaged investor who has been actively choosing your own funds, it could well pay to shop around.”

Richard Wilson, CEO, interactive investor, says: “Saving almost £100,000 with an ii SIPP compared to a life company pension sounds incredible, but it’s a very real prospect for an above-average earning 38 year old.

“What this research shows is what you might expect, that the old-guard pension industry lines their pockets at your expense, and relies on apathy and expensive TV ads to make you feel ok about it. What is a surprise is how massive the numbers are. This is money that should support your quality of life in retirement, or help secure your children’s future. 

“But now there is a choice. With our simple transparent flat fee, charges stay the same whatever the size of your retirement pot, and as your hard-earned wealth grows, you keep it.”

Most expensive

The most expensive of the options was Standard Life. Switching from the Standard Life SIPP to interactive investor could save our 38-year-old £94,800 over the next 30 years – but with the usual caveats pointed out by Moira O’Neill. 

The table below shows the potential cost savings of switching to interactive investor for a 38-year-old with an accumulated pension pot of £100,000* contributing £10,000 a year into their pension, invested in funds, for the following 30 years and retiring at 68. 

A 100% funds portfolio with an ongoing charge (OCF) of 0.66%

SIPP All Funds - 0.66% OCF
PORTFOLIO VALUE
Provider Funds Portfolio Value Funds Value Difference
Interactive Investor SIPP £1,104,900 £0
Vanguard Personal Pension £1,098,500 -£6,400
AJ Bell YouInvest SIPP £1,079,400 -£25,500
Scottish Widows Retirement   Account £1,071,500 -£33,400
Fidelity Personal Investing   SIPP £1,071,400 -£33,500
Barclays Smart Investor SIPP   Account £1,065,800 -£39,000
Aviva Personal Pension £1,061,500 -£43,300
Hargreaves Lansdown SIPP £1,041,500 -£63,300
Standard Life SIPP £1,010,000 -£94,800

See “notes to editors” for basis of calculations. “Funds value difference” shows the cost savings from switching to interactive investor’s flat fee model, and assumes the money saved each year is invested.

Moira O’Neill, Head of Personal Finance, interactive investor, continues: “Where you are best served as a pension saver depends on a lot of factors, including how much you have to start with. The comparisons we’ve commissioned put specialist investment platforms toe to toe against the life insurance companies. 

“Before switching out of any life company scheme check that you are not losing any benefits. For example some older life company pension plans, especially those you may have accessed through your workplace, come with an option to withdraw more than 25% as a tax-free cash lump sum or with generous guaranteed annuity rates. But for many there are potentially big savings to be made.”

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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