Older pensions could be delivering poor value for money:
In February, Research conducted by the Institute for Fiscal Studies funded by the Economic and Social Research Council, was published.
The new research found that:
- Many deferred pensions held by a sample of those in their 50s are in schemes with charges that are high relative to current market standards.
- Deferred pensions started longer ago typically have higher fees than pensions started more recently, and these differences do not look justified by better performance. Charges have fallen over time and deferred pensions often do not reflect these changing market conditions.
- Among people in their 50s contacting Profile Pensions, the average annual fee for deferred pensions taken out in the 1990s is above 1.1% of fund value, compared with around 0.9% for pensions taken out in the 2000s and 0.8% for pensions taken out in the 2010s. Very few pensions taken out a long time ago have low charges: four-fifths of the pensions started in 2013 have a charge of 0.75% or less, compared with just one-in-four of the pensions started in 2003 and one-in-nine of the pensions started in 1993.
- While the difference between 1.1% and 0.8% sounds small, it can make an important difference to retirement resources when cumulated over many years. For example, for a 50-year-old with a pot of £21,000, it would amount to a difference of around £2,400 at age 67 in today’s prices if annual investment returns going forwards are the same as the average over the past five years.
- Older deferred pensions may also not be invested in the way that people now want. Unlike with pensions taken out more recently, the equity allocation of pensions started longer ago is less likely to line up with a current assessment of people’s willingness to take on risk.
- This may be a particular issue for people approaching retirement, among whom the proportion of their pension funds invested in equities varies according to when their pension was started. Specifically, among pensions taken out more recently, there is a decline in the share invested in equities at older worker ages; no such decline is seen among pensions taken out longer ago.
Stratagem Financial Planning have explained this further in their blog post.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
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