Older DC pensions could be costing clients 'thousands'

Older DC pensions could be costing clients 'thousands'
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Older defined contribution pensions opened in the 1990s or 2000s could be costing clients thousands of pounds in higher fees, an advice firm has warned.

The Orchard Practice, a team of financial planners in Borehamwood, warned of legacy high management charges, which could be causing clients to pay thousands of pounds in over-market-value pension fees.

The team cited the latest research conducted by the Institute for Fiscal Studies, which found that many older DC pensions were delivering “poor value for money”. 

Among people in their 50s, the average annual fee for a DC pension taken out in the 1990s is above 1.1 per cent. This compares to a charge of 0.8 per cent for DC pensions opened in the last decade.

Although this difference between 1.1 per cent and 0.8 per cent could be perceived as minute. Over the decades a client’s pension will be invested, the fees will begin to accumulate. 

An example being: a 50-year-old with a pension worth £21,000 could have an additional £2,400 at the age of 67 if they switched from a pension charging 1.1 per cent to one with a 0.8 per cent fee.

This example assumes that annual investment returns in the future are the same as the average over the past five years. Therefore, the larger one’s pension, the more one could gain by making the switch. 

The IFS research also found that found four-fifths of pensions started in 2013 have a charge of 0.75 per cent or less. In contrast, just one in nine pensions opened in 1993 have a charge of 0.75 per cent or less.

The research assessed the returns of different pensions, finding that the higher fees of older pensions were not justified by better performance in many cases.

So, if a client does have an older DC pension, moving their retirement savings to another scheme may be beneficial, the research suggested.

In addition to potentially higher charges, older DC pensions may not be invested in the way a client prefers. Asset allocation decisions made many years ago may no longer suit a client’s retirement plans.

Joshua Gerstler, chartered financial planner, at The Orchard Practice, FTAdviser said: "The key theme is that older pensions tend to have higher charges.

"When we analyse a client’s pensions, we often find that transferring it into a more modern pension is better value for them.

"As well as lower charges, there are usually more investment options to choose from as well as more flexibility such as online access."

A client’s pension should reflect the investment risk profile and other factors, such as their planned age of retirement, he said.

This being said charges/fees should not be the only dataset that one determines whether a pension is providing value, other metrics include:

  • Investment performance: You should review charges in the context of the pension’s performance. A higher charge may be justified if retirement savings are growing at a faster pace.
  • Greater flexibility: Some older pensions may allow a client to access their savings sooner than newer pensions. If they plan to retire early, this can provide them with further freedoms.
  • Guaranteed annuity rate (GAR): Some older pensions may have a GAR. Today’s annuity rates are typically lower than the 1990s and earlier, so a client could receive a higher retirement income by retaining an older pension.

Kate Ogden, a research economist at the Institute for Fiscal Studies, said: “It is vital that people get the most out of the retirement saving they have done over their working lives.