New research suggests pensions savers lose £1.7 billion each year as they enter retirement

New research by Andrew Clare, Professor of Asset Management at Bayes Business School (formerly Cass), in association with Hymans Robertson for HSBC Tomorrow Master Trust, indicates that many pension scheme members entering retirement are facing a significant drop in their pension pot value by taking decisions that do not best serve their circumstances.

The report, Converting pension pots into retirement incomes: Are current roads delivering member value?, claims pension scheme members are losing £1.7 billion per year, largely thanks not being offered in-scheme retirement solutions by their providers or employers.

The report focuses on the current dilemma of most single employer, contract and master trust schemes in the UK not offering in-scheme retirement solutions, which forces members to go it alone and seek out third-party providers to convert their pension pot into an income.

Pension scheme members who transfer out in order to take retirement benefits generally move from an accumulation journey regulated by The Pensions Regulator, to a retail environment under Financial Conduct Authority rules.

This lack of ownership from governing bodies leaves members open to risk of fraud and erosion of value, while they are no longer being protected by the fiduciary and value oversight responsibilities of employers and trustees.

As a result, a large cohort of individuals make very costly mistake when accessing their pensions for the first time, including:

• Withdrawing pension funds as a single lump-sum when multiple withdrawals might reduce the overall tax payment;
• Paying for annual advice when fund size might suggest this wasn’t always needed
• Moving pension pots to another provider to access a drawdown product, which can include transfer fees and different annual management charges (AMCs).

Taking each point, the most recent Financial Conduct Authority (FCA) data for 2020/21 shows 705,666 people accessed their pension pots for the first time – a rise of 18 per cent on the previous year – with 56 per cent taken as a single lump sum. Out of these withdrawals, more than 10,000 were made without financial advice taken beforehand.

Drawdown purchases saw an increase of 24 per cent, and more than half (54 per cent) of those worth less than £50,000 took place with financial advice provided to the savers.

While sales of annuities rose by just 13 per cent in 2021/22, Hymans Robertson research shows that around half of DC pension schemes point members towards annuity broking services. However, virtually none offer in-scheme drawdown solutions.

Professor Clare said:

“As members transition into retirement, current pathways can erode the real value of pension savings that took a lifetime to accumulate.

“When schemes abandon them at this critical time in their lives, they are exposed to risks that they are often not equipped to face alone.”

HSBC Tomorrow Master Trust CEO Alison Hatcher, said:

“Pension savers need good value solutions that can fit into their lives and work for them. The friction, cost, and risk that members face as they enter retirement for the first time is a significant issue that is often forgotten or ignored. There is a major real-term impact that members are exposed to during this crucial moment in their lives and we need to find ways to fix and enhance value in this area.

“Our vision is focused on innovation with an absolute commitment to serve the evolving needs of employers, pension savers and retired members. Part of that includes a joined-up financial wellbeing and pensions journey for members, including a holistic retirement savings and benefits platform which is digital but backed up by personalised support.”

Kathryn Fleming, partner at Hymans Robertson, said:

“The reality is, many individuals with small pots wanting to convert their plans into a regular income do not have sufficiently complex needs to warrant full adviser charging.

“Guidance or low-cost advice propositions in conjunction with the ability for individuals to leave their DC pots invested in cheap, well governed employer-sponsored products are likely to lead to much better retirement outcomes for many individuals.”

The Converting pension pots into retirement incomes: Are current roads delivering member value? report by Professor Clare and Hymans Robertson for HSBC Tomorrow Master Trust is available for download.