Savers are unaware they could wipe more than £100,000 from pension pots when they consolidate them, a study has found.
Around 1.5 million transfers are carried out every year by workers who want to manage their pensions in one place.
Many do this to make it easier to plan for retirement and to prevent smaller pots getting lost. But a lack of clarity on pension fees mean savers who believe they are making a smart move could be left with a smaller nest egg by retirement – and in turn be forced to work longer.
A study conducted by researchers Ignition House and provider The People’s Pension, revealed many have no idea about this pension switching trap.
Ignition House carried out 20 in-depth interviews with savers who consolidated their pensions and found that many do so without fully understanding how it will affect their fees.
Pension fees are notoriously difficult to understand and compare between providers
The reasons they gave for consolidating their pensions was to reduce admin, keep a closer eye on retirement goals and reduce the risk of losing pots.
With workers now doing an average of 11 jobs in their careers, it is easy to see how a workplace pension can get lost and become part of the £31.1 billion sitting in dormant accounts.
Those who thought about charges – most had not – were mainly worried about exit fees for transferring a pension, and had not considered ongoing management costs.
Pension fees are notoriously difficult to understand and compare between providers.
The main fee is an annual management charge for running the scheme and investing your money. This could be a flat fee or a percentage of your pot size.
There may also be inactivity fees. Exit or transfer fees are no longer allowed for new plans but were common on older ones.
Even those who were aware of their pension fees assumed that any charge under 1 per cent was so negligible that it would hardly affect their nest egg. In reality, even half a percentage point difference has a huge impact.
Patrick Heath-Lay, chief executive of The People’s Pension, says people need better support and clearer information when making critical decisions about their pensions
For example, if you transfer a £50,000 pension pot at age 30 to a provider charging 0.9 per cent you’d have a £643,158 nest egg by retirement, according to calculations by The People’s Pension. This assumes earnings of £30,000 with an 8 per cent annual contribution into a pension and 5 per cent annual investment returns. If charges were 0.4 per cent, your pension would grow to £769,475 by retirement – some £126,317 more.
Patrick Heath-Lay, chief executive of The People’s Pension, says: ‘Savers are transferring pensions for convenience with the absence of consideration of value. They need better support and clearer information when making these critical decisions. At stake is not just money, but the retirement that people have worked so hard to secure.’
Some interviewees were unaware of the difference between a flat-rate fee and a percentage-based fee. Many thought having just one fee would always be cheaper than charges on two separate pots.
David Dunn, 38, from Dorset, was under this impression when he consolidated two workplace pensions. The father-of-two has two pension pots from the same engineering company where he works, because the provider was changed in 2016.
His original pot was not transferred but instead left to grow with the old provider. However, a couple of years ago he spotted that fees were draining both. He says: ‘All I knew was that there was money going out of two pots, and I wanted just one charge.’
At the end of 2023 David chose to transfer his older pension into the pot he is currently paying into, without researching the fees. ‘I didn’t have time as I’m always busy, whether that’s volunteering, working or being a dad.’
David now knows his older pension was charging 1 per cent each year while his new one charges 0.6 per cent. If his newer pot charged the higher fee, thousands would be wiped from his nest egg by the time he retires.
The study found many interviewees had positive transfer experiences, with applications typically taking ten minutes. But information on fees was often hidden away, with one customer who had to make 18 clicks on a provider’s website before finding information about charges.
