Britain’s pension funds are seriously underperforming, with savers receiving far less income in retirement as a result. Research from Stockbroker AJ Bell published in the summer showed that nine in 10 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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Rachel Reeves delivers Spending Review: what does it mean for your money?Chancellor Rachel Reeves’s Spending Review will see some departments’ budgets rise, but others won’t be quite as lucky. We look at what has been announced, and what it could mean for your money.
-
Divorce financial settlement fights surge – why it pays to agree terms earlyLawyers expect more court battles as tax rises and sharp falls in asset values make divorcing financially more difficult.
-
Flex first, fix later: a hybrid retirement strategy to considerYou needn’t choose between income drawdown and an annuity in retirement. What is a “flex first, fix later” approach?
-
Has your pension plunged in stock market turmoil? How to avoid creating real shortfallsSliding stock markets are no reason to sell out of your pension in a panic, says David Prosser
-
Pensions revolution: how to profit from the trends shaping the UK pension systemThe UK pension system is one of the biggest in the world. Big changes are under way, says Rupert Hargreaves
-
What pension providers don't tell you about your retirement moneyCheck the small print from your pension provider or risk losing thousands.
-
Are lifestyle funds still fit for purpose?Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
-
How inflation will hit your pension savingsAnalysis Many pension schemes that offer protection from price rises may not be as good as they seem.
-
Why you should use a salary sacrifice scheme to save more into your pensionAdvice Salary sacrifice schemes can be a valuable perk when you are building up a pension, says David Prosser.
-
The risks of using equity to release to cash in on your homeAnalysis Equity release is getting more popular. But think carefully before joining in, says David Prosser.
