Pension blind spots cost an average of £120K over a working life

interactive investor launches Show Me My Money 2022 report, revealing the scale of pension blind spots in the UK – and the cost.

• 77% of people do not know how much they pay in fees for their pension, despite possible average savings of £259 a year*, according to interactive investor calculations (roughly £12,000 over a working life)
• A third of respondents said their pension was invested in low-risk funds; another third didn’t know the risk level of their pension. Interactive investor calculates the price of being in a lower-risk fund (rather than one targeting higher growth) and paying high fees could be around £120,000 over an average worker’s career**
• For the full ‘Show Me My Money’ 2022 Report, visit www.ii.co.uk/pensions/SMMM

interactive investor, the UK’s second-largest direct to consumer investment platform, is urging millions of pension savers to ‘check their fees’ on old and current work pensions, as it publishes its second ‘Show Me My Money’ report. It reveals the huge cost to UK households of being kept in the dark on key pension details, such as fees and investment plans.

The first report urged ‘meaningful transparency’ from providers on costs and holdings in pensions. Two years on, with millions of people still in the dark and the cost-of-living crisis hitting hard, the latest report asks pension savers to take back control over their life-savings pot, by checking their pension fees and investment plans.

The platform calculates that a typical pension pot could end up around £120,000 lower on retirement, as a result of a lack of awareness of investment choices and fees. But before switching out of a life company scheme, people need to check that they are not losing any valuable benefits, warns ii.

Two years on from ii’s initial research, the platform points out that a huge engagement gap remains, and yet – perhaps there has never been such an important time to be looking at pension costs.

77% of people still do not know how much they pay in fees for their pension, according to research by Opinium on behalf of interactive investor. A third of respondents said their pension was invested in low-risk funds; another third didn’t know the risk level of their pension. Almost half of people (48%) don’t know how much is in their pension pots.

Richard Wilson, CEO, interactive investor, says: “Potential savings of over £100,000 over a working life, just by dialling up your risk appetite and finding a better value provider, might seem like the stuff of dreams. It’s one of the pension industry’s best-kept secrets.

“Two years ago, we called on life company pensions to up their game on transparency. But old habits die hard from an industry that has benefitted from pension blind spots for many years.

“More and more people are switching from life companies to investment platforms such as interactive investor – they are the biggest source of transfers into the ii SIPP. But most people are still completely in the dark, and it can have a devastating impact on retirement outcomes.”

Netflix, Amazon Prime and Disney+

As the cost-of-living crisis continues to surge, many people will be looking at their monthly expenditure – deciding whether having Netflix, Amazon Prime Video or Disney+ is really worth it; shopping supermarket-own brands, pausing unused gym memberships and switching utilities providers. However much greater savings are available through moving old pension pots to better value providers.

The real price to pay for the UK pensions engagement gap

According to ii’s research,theengagement gap over an adult lifetime of pension saving could add up to an average of around £120,000 in unnecessary fees and missed investment growth.

This is life-changing money – lost.

Becky O’Connor, Head of Pensions and Savings, interactive investor, explains: “It’s time people took control over what their pension is doing and how much it is costing.

“Someone with the average pension pot size of £86,232 could save £259 a year on average, over their career, by moving their pension from a provider with typical charges of 0.48% to ii’s Pension Builder, which costs £12.99 a month.

“£259 a year works out as £21.58 a month. That’s £21.58 a month an average worker could be saving each month to help pay for a multitude of other living costs – and you are still getting the all-important investment growth within your pension pot. By comparison, the typical saving by switching broadband provider is £143 a year** - yet we hear far more about switching broadband than moving pensions.”

O’Connor adds: “One reason people are not aware of the potential savings to be made from finding out what these hidden but material fees are, is that unlike with TV subscriptions, you don’t get a pension fee coming out of your bank account every month, it is simply taken off the pension balance – so you might never even know you are paying it.

“The other reason is really important – you can’t just switch away from your current workplace scheme, as you could lose your employer contributions. However, your employer might consider paying into a pension you have set up for yourself – you can ask them if this is possible. If not, then moving old workplace pensions you are no longer actively paying into might also save you a lot in fees – and you don’t have to worry about losing out on current employer contributions. Just make sure you are not losing any valuable benefits first, because some older life company pension plans, particularly ones accessed through work, come with an option to withdraw more than 25% as a tax-free cash lump sum or with generous guaranteed annuity rates. But for many, there are potentially big savings to be made.”

“It seems the engagement gap with our pension pots is being driven by a lack of visibility and lack of agency. Unfortunately, this is money that people don’t always even know they are paying, which they might be paying unnecessarily and could really make a difference to their lives. Our industry needs to deepen people’s understanding of their pensions, which will help prompt confident actions – and for many of us, this might mean switching former workplace pensions.”’

Meanwhile, over the same time period, the extra growth generated by someone moving from a low-risk fund with average annual returns of 2% to a higher growth fund with an average 4% annual return is an estimated £110,000.

As the ii Show Me My Money report emphasises – providing information with the context that helps people understand it is instrumental for greater perspective. It might mean the difference between someone quickly glancing at their pension statement and someone making a potentially life-improving decision to alter their investment plan – or change providers.

Outlining the structure of the Show Me My Money 2022 Report, Becky O’Connor, the paper’s author, explains: “The report addresses all of the key aspects of pension saving – contribution levels, risk levels, what is actually in someone’s pension (and finding this out in the first place), and what fees people are paying.

“We can see many people in the UK are still very much in the dark on all of these. But we are talking about people’s life savings. It is simply not enough to assume the understanding is there, when this research demonstrates that it is nowhere near.

“What remains a key concern is the lack of awareness when it comes to pensions fees, which is costing people a huge amount of money at a time when finances are increasingly being squeezed. This is a crucial area we investigate in more depth within the report.

“We also wanted to go a step further and ask whether people believe their pension fee is relatively good value for money or not, and a staggering 60% did not know – again, pointing to the sheer lack of meaningful context which would allow for comparison.”

“Interestingly, the older age group was far more likely to say they didn’t know if their pension was good value or not – 73% - almost three-quarters, have no idea. This is very troubling because it means older workers could be more vulnerable to being ripped off on fees. The one glimmer of hope from the report is that younger people demonstrate greater levels of awareness and engagement – possibly a sign that pensions are taken seriously by this economically constrained, but at least auto-enrolled, generation.”

Meet your ‘FFF’ – AKA, your new ‘BFF’

Becky O’Connor adds: “Also, let’s address the word ‘pension’ itself, which is all too often a term that many wince at the thought of, or joke about, or simply avoid thinking about altogether. It has become synonymous with uncomfortable thoughts of difficulty in old age, which could be one of the key reasons why there is still such a lack of engagement on this topic, especially with people of a younger working age.

“Even something like: ‘Future Finance Fund’ instantly makes it more exciting planning for your future – and think of how this can be communicated to younger people – ‘Your FFF is your BFF!’ and so on.”

Are you keeping up with the Joneses on pensions?

In this research, ii emphasises that more transparency over what’s in other people’s pension pots, as well as your own, can help you gain a sense of how you are doing relative to others – and this can be instrumental context and can help people decide whether their pensions suit their life stage/financial goals, and whether their pension is good value for money.

Because of this, in 2022’s report, ii has added curves to help readers work out where they are on the pensions curve, relative to others in their cohort and more broadly.

If you have a pension, you are on the curve!

In fact, ii research shows that 74% of people have a pension in the UK – this means around one quarter do not.

In addition, more men than women say they have a pension – 81% of men, compared with 68% of women.

Show Me My Money 2022: key findings

• 26% of people say they do not have a pension
• The average pension pot size across all ages is £86,232
• The average pot size among the over 55s – those who can start to access their pension – is £132,464
• Just 2% of the over 55s have a pension worth more than £1 million currently, up from 1% across all ages
• Engagement is working! Younger people demonstrate greater awareness of what their pension is worth, what fees they pay and what it is invested in than older age groups
• The average monthly contribution people say they make is £240.50, or £2,886 a year. Men contribute an average £309 a month compared with £172 for women
• Middle age is the peak contribution period: 35- to 54-year-olds contribute £261 a month, compared with £245.40 a month for younger workers
• Contributions start to decline in the 55+ age group to an average of £218 a month, or £2,616 a year
• The average amount people say they contribute monthly including tax relief but excluding employer contributions is 11.2%

Where are the big gaps in pension transparency?

• Almost half of people (48%) don’t know how much is in their pension/pension pots
• Around half of pension holders (48%) know how much they contribute
• Average contributions among those who know are £247 a month; the average percentage of those who know the % of their salary they put away is 11.6% each month
• More than three quarters of people – 77% - don’t know what fee they pay for their pension
• This increases to 90% among the over 55s

Becky O’Connor, says: “The key message is, planning for your future financial health should not be headache-inducing, but if you are finding that it is – you are not alone. Much more work needs to be done to break down the taboo around pensions, as well as making the relevant information much more accessible to all. This is where our ongoing Show Me My Money research comes in –we will continually fly the flag for investors who deserve much more clarity and quality of information. Enough is enough – let’s finally lift the lid on all things pensions, or as we like to call them – Future Finance Funds!”

* Based on average pension pot size of £86,232. Annual charge at 0.48% fee is £414 a year compared with £155 a year for ii Pension Builder. 0.48% is the average charge for investments within a workplace pension. Annual management charges may be higher:https://www.gov.uk/government/publications/pension-charges-survey-2020-charges-in-defined-contribution-pension-schemes/pension-charges-survey-2020-summary

** This assumes someone is on a starting salary at £25k and has 1% salary growth. Starts pension age 22 finishes at 67. Lower growth return of 2% and higher growth of 4%.

*** according to Which?

The Show Me My Money research was conducted by Opinium on behalf of interactive investor. Opinium interviewed 2,000 people between 26 and 29 November, 2021