Swathes of consumers are moving out of older pensions from well-known life company brands.
There’s a common perception that SIPP transfers are primarily between investment platforms.
Look under the bonnet and there is a quiet pensions revolution going on. Swathes of consumers are moving out of older pensions from some of Britain’s best-known life company brands to lower cost investment platforms as investors start to challenge service and cost.
Of the top five transfer-ins to the interactive investor SIPP, four out of five are from some of Britain’s best-known life companies (see table below).
interactive investor Top 5 SIPP Transfer in over year to date
So, what is driving this groundswell? The search for value for money is a likely contributor:
- By the 1999/2000 tax year, the year before stakeholder pensions came in with their charges cap of 1%, £5.7 billion of individual contributions were already being paid into personal pensions (source: HMRC).
- By 2009 there were 1.2 million people with money in trust-based workplace pensions to which they were no longer contributing (source: the pensions regulator).
- By 2012, there were over 4 million non-stakeholder workplace personal pension contracts in force (source: ABI). This is when new rules on ‘auto enrolment’ into workplace pensions came into effect. Pensions used for this now have their charges capped at 0.75%.
Richard Wilson, CEO, interactive investor says:
“Four out of five pensions transferred to ii come from the major pension and life companies. The ones that spend a fortune on TV advertising with shiny black horses running around. They hope their customers won’t notice they are being quietly ripped off, and best of all, when they change jobs they will leave their pension behind and forget about it. Our customers won’t fall for that. They want a simple, transparent service where they have full control of their financial future.”
There are billions sitting in lost pensions. You can use the free online service at www.findpensioncontacts.service.gov.uk to help you find pensions you've lost track of.
Life company pensions versus SIPPs
Financial services consultancy, the lang cat, carried out research on our behalf into the differences in product and investment costs of old life company pensions and modern SIPPs - such as the ii SIPP - and their potential financial impact over a 20-year term. It used a combined product and investment charge of 1.05%, which is representative of a 1990s era personal pension.
A pot of £150,000 today with this level of total charge, with an ongoing monthly contribution starting at £200 and increasing each year in line with inflation, would mean total combined product and investment charges of £55,176 over the 20-year term.
The total product and investment cost for an ii SIPP, with its monthly service charge of £19.99 and an aggregate annual investment charge of 0.77%, which is representative of an actively managed portfolio, would be £47,080.
The difference of £8,096 is striking enough but, even more so is the difference that can make to the final value of the retirement pot: £14,379, based on annual investment growth of 5%.
Moira O’Neill, Head of Personal Finance, interactive investor says: “Many of us will have accumulated several pensions over the years. It can be easy to lose track of them and sometimes those older plans may no longer be the best option or represent good value for money. That’s why there’s a strong argument in favour of bringing your different pensions together under one roof, whatever stage of the investing journey you’re at – and this will be informing much of our own SIPP traffic. It allows investors to have more of a say in where they put their pension – whether that’s ethical funds, active funds, passives, investment trusts or direct equities.
“Consolidating your pensions in the one place makes them easier to monitor and manage, reduces hassle and paperwork and helps you identify the pension investments that aren’t working, or which look more expensive than they need to be. Investors can’t control the stock market, but they can control the charges they pay on their investments – which can really eat into your returns. A flat fee structure, like that charged by interactive investor, means that as your wealth grows over the long term, the amount you pay to us stays the same.
“But it might not be the right thing to do for everyone and requires careful consideration of what you might be giving up as well as what you could gain. Many pensions taken out prior to April 2006 include an option to take more than 25% as a tax-free cash lump sum, while certain older plans may come with guaranteed annuity rates (GARs) that promise income considerably higher than that currently available on the annuity market.
“Defined benefit plans pay a pension equivalent to a proportion of your salary, based on how long you worked for that employer. That pension is guaranteed and if you move it to a defined contribution plan, like the ii SIPP, you’d be giving up that guarantee and may not be able to secure the same level of income. The pension regulator has given pension trustees powers to freeze transfers out of defined benefit or final salary schemes for up to three months due to the financial fall-out from the pandemic. Also, The Financial Conduct Authority insists on you seeking professional financial advice if you’re thinking of transferring any safeguarded benefits worth more than £30,000.”
Steve Nelson, Consulting Director, the lang cat, says: “There’s no question that some of the older style defined contribution pensions have much higher charges in comparison to many SIPPs available today. It’s a relatively simple case of arithmetic to work out the considerable savings you could make by opting for a newer, cheaper pension product. What’s not so straightforward is tracking down all the various pension pots you’ve accumulated over your working life. But if you do decide to do that and bring them all together, you’ll be able to work out how much is going into the coffers of some very large pensions businesses, instead of working hard for you. You might well be amazed. Just remember that some of the older style pension plans come with valuable guarantees, so tread carefully before making any rash decisions.”
Holly MacKay, Founder and CEO, Boring Money, says: “For those in their 50s, a pension can be a murky thing – we’re not sure how much we’ve got, where it is, what it costs or how our money is put to work. Gradually I think increased expectations for clarity and information will help people realise that their pensions are not an opaque lump of money in which they have no say – it’s just a savings account and we should all have a clear sense of what it looks like.”
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