The £30k cost of picking the wrong pension
Picking the wrong pension can leave savers close to £30,000 worse off in retirement because of fees which eat into returns, analysis shows.
Pensioners who pick a more expensive pension provider could pay up to £27,257 more in fees and charges over ten years compared to the cheapest scheme on offer.
Pension fee structures typically range from 0.06pc to 0.52pc on pots of £250,000, which come on top of fees charged by the underlying funds in the pension pot.
For a saver who has chosen to go into drawdown on a pot of £250,000, choosing a pension with the provider Interactive Investor account, rather than the most expensive provider, Prudential, could net them an extra £12,139 in savings on fund charges in five years. This assumes the pension funds make the same 3pc annual return.
Over the course of a decade, these savings balloon to £27,257, consumer group Which? calculated.
The cost of investment has become increasingly important for retirees whose life savings are mainly now invested via “defined contribution” pots where the saver is responsible for the investment, as opposed to older “final salary” schemes where the risk of investing was pooled into one large investment fund.
Those going into drawdown, which is when a pensioner keeps their money invested and takes an income from it, rather than purchasing an annuity or receiving an inflation-linked pension income from a final salary scheme, face the risk of the value of their pot plummeting as a result of market fluctuations.
As a result, the Financial Conduct Authority (FCA) introduced a range of “investment pathways” in 2021, which aimed to make sure that those who did not take financial advice were not making poor decisions.
These are ready-made investment options for those accessing their pots after the age of 55.
Each option comes with their own nominated investment fund, which is chosen by the provider on behalf of the pensioner.
The most popular pathway, pathway three, is designed for those who “plan to start taking my money as a long-term income”. It is taken up by 35pc of customers on average.
This option has the highest average total charge, at 0.54pc on pots of £250,000.
The next most popular pathway, for those with no plans to touch the money within the next five years, comes with average total fees of 0.52pc.
There is no cap on the amount that drawdown providers can charge, unlike charges on auto-enrolment workplace pensions, which are capped at 0.75pc.
But more than a quarter tend to opt for the fourth pathway, designed for those who “plan to take out all my money within the next five years”. Just 4pc choose an annuity pension.
A 2023 review of the pathways system found that it was preventing customers becoming confused or taking all their money as cash.
Following the introduction of the FCA’s “Consumer Duty” rules in 2023, a number of providers removed products from the market.
Firms are now mandated to offer fair value and avoid “foreseeable harm”, including retirees paying more in fees than they are likely to see in returns.
Providers said that it was important to “look under the bonnet” on each plan, and to consider how they are managed, rather than simply considering fees.
Others said that customers who were taking an income from a fund would not achieve 3pc growth per year, and would therefore see their fees reduced.
Camilla Esmund of Interactive Investor, said that the analysis revealed the “often hidden” impact of fees.
She said: “As an investor, keeping your costs low can mean a more comfortable retirement, so it’s essential to understand what you’re paying and make sure fees are fair, reasonable, and good value.”
Prudential was contacted for comment.
Recommended
When (and how) to drawdown your private pension
