Many would benefit from taking active decisions over past pensions, and this needs to be made easier to do
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Some pension savers could be thousands of pounds worse off if they fail to shift older pots into ones offering better value for money, the IFS (Institute for Fiscal Studies) has warned.
Many working-age people have pension pots that they are no longer actively contributing to – and there are concerns that these pots could provide declining value for money over time if savers do not engage with them.
The research looked at defined contribution (DC) pension pots which people were no longer contributing into but were yet to start drawing money out of.
It found that many held by a sample of people aged in their 50s are in schemes with charges that are high compared with current market standards.
Few pensions taken out a long time ago have low charges, according to the research, funded by the Economic and Social Research Council.
The average annual fee for deferred pensions taken out in the 1990s is above 1.1% of fund value, but this falls for pensions taken out in the 2000s to about 0.9% and for those taken out in the 2010s to about 0.8%, the IFS found.
Small differences in percentage points can add up to big differences in the amounts of cash accumulated over time.
For example, for a 50-year-old with a pot of £21,000, the difference between a 1.1% and a 0.8% charge would amount to about £2,400 by the age of 67 in today’s prices, researchers estimated.
Higher fees do not necessarily mean someone will get more for their money.
The IFS found that investment performance over the past five years was generally similar among schemes in its sample with higher charges and those with lower charges.
Older deferred pensions may not be invested in the way that people now want, the IFS added.
For older savers nearing retirement, there may be a risk that older pensions are inappropriately invested in riskier investments, it cautioned.
Kate Ogden, a research economist at IFS and one of the authors of the report, said: “It is vital that people get the most out of the retirement saving they have done over their working lives.
“This won’t happen automatically. Older personal pensions risk becoming poor value for money.
“The fees charged are often higher than those on pensions taken out more recently.
“In addition, how they are invested can become less appropriate as individual circumstances change.
“Many would benefit from taking active decisions over their past pensions, and this needs to be made easier to do."
“But greater individual engagement will never completely fix this issue, and policymakers need to consider wider initiatives to encourage value for money in older pensions.”
A spokesman for the Association of British Insurers (ABI) said: “Today’s pension market is competitive and it is much more straightforward to start saving or to consolidate pensions.
“We agree that more can be done to make it easier to make active decisions."
“A change in the advice rules would enable providers and guidance services to support savers further.”
A Department for Work and Pensions spokesman said: “Our plans for pensions dashboard will revolutionise how savers of all ages access their pension information and make decisions, allowing them to see what they have in their various pensions, at the touch of a smartphone screen, at any time they choose.
“Savers are also able to use our find pension contact details service to track down contact details for a lost pension.”
