Should you switch your pension fund?

Do you know how hard your pension fund is working for your retirement? If not, it could be time to check, and to consider changing pension fund provider if your returns aren’t keeping pace with your needs.

For many people, saving into a pension to fund retirement is lower down the list of financial priorities until they approach retirement age – but by then, it’s really too late. The advantage of investing into a pension fund or Sipp is that they accumulate value which compounds throughout decades of your working life.

Nearly half (47%) of Brits are unaware of how much their pension funds are generating for them, research from Standard Life shows. The study of 2,000 Brits found 52% of baby boomers cannot put a figure on how much they have in their pension savings. Encouragingly, that figure is lower among younger generations: only 43% of Gen X and 38% of millennials are unable to say how much they have saved in their pension.

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The assumption is often that you can save towards your pension through auto-enrolment, and not have to think about it. But not all pension funds are created equal. Many of them underperform: last year, AJ Bell produced analysis showing that many were failing to keep pace with the UK stock market, as measured by the FTSE All Share Index.

If you think you could achieve greater returns elsewhere, switching your pension fund provider sooner rather than later may boost your pension savings, especially if, like many people, you’ve been paying into a default pension fund throughout your working life without ever shopping around.

Even small differences in performance have a substantial impact over time. AJ Bell’s figures showed that 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.

“It is extremely important to continually review your pension arrangements,” said Daniel Hough, wealth manager at RBC Brewin Dolphin. “Ideally this would be every year, but at least every five years or at a change of job (whichever comes first). This is to sense-check that they are in the right place and performing as expected.”

What are the advantages of switching pension fund provider?

While periodically reviewing your pension fund provider is a must, there are also several advantages to be gained by switching your pension fund provider.

“There are a few potential advantages of switching,” said Hough. “You may wish to move to a provider that has better technology with an advanced online platform/app.”

Hough continued: “A new provider may have more investment options/funds or better accessibility options such as a Sipp (flexible drawdown or uncrystallised Funds Pension Lump Sum – UFPLS) for the member.”

Hough also observes that alternative pension providers might offer better death benefits for your family, such as beneficiary drawdown or return of fund, though the rules on this could change in future.

Similarly, Interactive Investor highlights the following potential benefits to switching your pension to a new provider:

• Lower charges: switching pension provider could potentially reduce the cost of your pension fees.
• Ease and convenience: consolidating pensions into a single fund could make it easier to manage your finances.
• Wider array of investment choices: You can choose to transfer to a Sipp if you’d like to take advantage of a wider range of investment options and you are comfortable to take control and make your own investment decisions.
• Flexibility at retirement: Transferring to a new pension scheme might give you greater control over your drawdown income.
• Better service: Transferring your pension to a provider of your choosing means you could pick one that offers better service. This could be especially beneficial if you want more freedom to choose how your pension is invested or are looking for more competitive charges.

What to consider before switching your pension fund

It isn’t just about performance, though that is one of the most important factors to consider when selecting or switching your pension fund.

“Consider how satisfied you are with the level of service, including accessibility, ongoing charges, and fund selection” as well as reviewing the underlying investments, suggests Hough.

You’ll also want to consider your risk tolerance level, which will depend largely on your age and how long you plan to keep working before retirement.

“Over time your attitude to risk may change,” said Hough. This might mean you de-risk your pension fund as you get closer to retirement by moving away from growth-focused assets like equities, in favour of fixed-income investments and cash which are typically safer investments over the short term.

“Some providers have funds that offer this service, while others have ‘managed’ or ‘multi-asset’ funds and then there are providers that allow you to freely pick any of the thousands of stocks you wish,” says Hough.

Hough also recommends comparing your fund selection to their associated benchmarks in order to assess their performance levels. “Understanding your options is the key here and it is highly advised that you seek professional advice before making any changes to your pension arrangements,” he adds.

Finally, it is important to consider exit fees. These could outweigh the benefits of switching pension fund provider, so check them carefully before taking any decision.

It is also worth discussing your pension plans carefully with a financial adviser if possible, and at any rate not rushing into a decision without considering it carefully first. Ensure, above all, that you are not falling foul of a pension fraud scheme.