Are your old pension pots doing as well as they could? Do they still reflect your attitude to risk? Experts from the Institute for Fiscal Studies are offering their advice on how you can make sure they are still fit for purpose.

New research shows that many people are holding their money in old DC schemes which have higher charges than are normally charged today – and are at risk of losing thousands of pounds due to charges which are often not justified by better performance.

It also shows that the risk profile adopted when the pension was taken out may no longer reflect how the saver now wants their money invested.

The research, funded by the Economic and Social Research Council, was carried out by the Institute for Fiscal Studies using data provided by Profile Pensions from 18,317 people aged 48–60. It reveals that where the average annual fee for deferred pensions taken out in the ‘90s was above 1.1 per cent of fund value, by the 2000s, this had dropped to 0.9 per cent for pensions taken out in the 2000s – and 0.8 per cent for pensions taken out in the 2010s.

Leaving these pensions where they are, warns the IFS, could mean savers missing out on higher returns, which could add up to be worth thousands of pounds during the lifetime of a scheme: for example, a 50-year-old with a pot of £21,000 could lose out on £2,400 by age 67, when compared with current prices.

Kate Ogden, 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 savings. This won’t happen automatically. Older personal pensions risk becoming poor value for money.”

The survey also revealed that the equity allocation in older deferred pensions may not reflect the saver’s current attitude to risk – which may be a particular issue for those approaching retirement, say the IFS.

The answer for those concerned about whether they should be moving their pension pot is that expert advice is also advised before making any decision – however, for those with smaller pots there is a risk that the costs and hassle involved might deter them.

Kate Ogden concludes: “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: policymakers need to consider wider initiatives to encourage value for money in older pensions.”

The IFS findings

• Pension fees have fallen over time, yet deferred pensions often do not reflect these changing market conditions. Among a sample of people in their 50s with deferred DC pensions, four-fifths of pensions started in 2013 were in a scheme with charges of 0.75% or less, compared with only one-in-four of pensions started a decade earlier in 2003 and one-in-nine of pensions started in 1993.

• In 2016–18, 40% of those aged 40-59 with at least one deferred DC pot were not confident that their income in retirement would give them the standard of living they hoped for. It is therefore particularly important that people obtain the best possible retirement outcome they can from the contributions they have made over working life.

• Even the difference between annual fees equivalent to 0.75% and 1.0% of funds can have an important effect when cumulated over many years. For example, for someone aged 50, this can imply a difference of 4.4% in resources at 67 assuming annual investment returns of 7.7% in both cases. For a 50-year-old with a pot of £21,000, this would amount to a difference of £2,000 in today’s prices at age 67.

• Having higher-than-average fees does not necessarily mean a pension
  scheme is not good value for money. However, investment performance over the past five years is generally similar among those schemes in our sample with higher charges and those schemes with lower charges, showing that the higher average fees among older pensions are not always offset by better returns.

• Another risk with older pensions is that the portfolio allocation may no longer be appropriate. In our sample, the share of funds invested in equities for deferred pensions started in the last decade was on average 45% among those aged 60 compared with 66% among those aged 50, consistent with people moving away from risky assets in the run-up to retirement. But among pensions started in the 1980s and 1990s, there is no difference in the average equity allocation depending on people’s current age; those aged 50 and 60 both have on average over 70% invested in equities.

• This suggests that for older savers, there is the risk that older pensions are inappropriately invested in riskier investments such as equities. Similarly, we find evidence that the investments made in older pensions are less well matched to an individual’s current risk preferences than those in pensions taken out more recently.

• Many of these issues could be solved with greater individual engagement with pensions, but this is very hard to achieve. Initiatives such as the Pensions Dashboard should help some people engage with their deferred pensions. But this is unlikely to be enough on its own to ensure appropriate investment strategies and value for money. The government and the Financial Conduct Authority may need to continue to look at wider initiatives and regulation to help encourage value for money, particularly for deferred DC pensions.

You can download and read the full report here: https://ifs.org.uk/uploads/IFS-BN338-The-risk-of-pension-inattention-in-a-DC-world.pdf

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