Should you switch your pension fund?
Many pension fund options are poor performers, thanks partly to high charges. Is it worth the switch?
Britain’s pension funds are seriously underperforming, with savers receiving far less income in retirement as a result. Stockbroker AJ Bell reveals that nine in ten UK pension funds have failed to keep pace with funds that simply track the UK stock market, as measured by the FTSE All-Share index, over the past decade. Almost three-quarters have underperformed by more than 10% and more than a third are at least 20% behind.
Well-known pension providers singled out for criticism include Clerical Medical, Phoenix, Scottish Widows and Standard Life. Even small differences in performance have a substantial impact over time, AJ Bell warns. A saver with a £50,000 pension fund would see their savings grow to £167,357 over the next 20 years if their fund returned 6% a year; if that return dropped to 4%, the final pot would be worth only £109,556.
Is it worth switching your pension fund?
There are several explanations for the poor performance of many funds. Some of the largest and most long-standing pension funds do little more than track the market closely, but charge very high fees for doing so, says AJ Bell, with underperformance then an automatic result.
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Indeed, expensive charges are at the root of many issues – even stakeholder pension plans, subject to a regulatory cap on charges, are often several times more expensive than the cheapest trackers. Another problem is that many of the largest and worst-performing pension funds in the UK are now closed to new savers. Managers and pension providers have little incentive to do better since they’re not trying to win new business. They rely on savers’ inertia to keep hold of their cash.
For savers, this research is a stark reminder to keep track of the progress of your retirement planning. It makes sense to review your existing arrangements once a year.
Pension providers are expected to publish detailed data on their fund performance, including comparisons with relevant benchmarks, which enables you to assess how well they are doing. If you’re not happy with how much information you’re receiving, ask for more.
Charges are a crucial part of the picture. Make sure you understand exactly how much you’re paying your pension provider each year, including fund costs and administration fees such as the charges made by investment platforms. The cheapest tracker funds now cost as little as 0.3% a year, including platform costs, while actively managed funds typically demand around 1% a year. By contrast, some of the funds identified in AJ Bell’s research are charging twice as much.
If you’re unhappy with your current funds, transfer to more attractive alternatives. Check whether doing so means giving up any valuable perks: some older pension plans offered guaranteed rates of income in retirement, which will be difficult to match. But that won’t apply to the majority of people.
Switching your pension fund doesn’t necessarily mean changing pension provider. Your existing plan provider may have better options – and, in any case, it may be tricky to switch providers if you’re saving through a workplace plan.
Equally, don’t be daunted by a full-scale change of pension provider, if that’s what’s necessary. Take independent financial advice if you’re worried about choosing for yourself. Finally, don’t think of shaking up your retirement savings as a one-off exercise. Keep reviewing your retirement planning regularly – you may need to ring the changes again in the future.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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