| Typical adviser charges | |
|---|---|
Scenario | Average cost over five years Article continues after advert |
Taking out a £300,000 mortgage | £419 (upfront) |
Creating a financial plan involving £100,000 of investments and receiving ongoing advice about it for five years | £7,597 (£2,795 upfront and £4,802 ongoing) |
Investing £250,000 and receiving ongoing advice about it | £14,805 (£8,881 upfront and £9,940 ongoing) |
Consolidating three pension pots totalling £500,000 and receiving ongoing advice about it | £27,868 (£8,881 upfront and £18,987 ongoing) |
Average hourly rate | £196 |
| Source: VouchedFor quoted by Which? | |
Another pensions timebomb?
The problem is far worse where no advice is taken, at least in unadvised defined contribution pension transfers.
Billions of pension money will be transferred when the new dashboard is up and running.
According to the People’s Pension, market activity for unadvised DC transfers has already increased by more than 50 per cent in just four years. It calculates losses to pension scheme members have risen from £792mn in 2020 to £1.2bn in 2023.
This is the extra cost of charging for people switching from a lower charging workplace pension, which are subject to a charge cap, to higher charging, uncapped, retail schemes, for their lifetime pension savings.
Charges can make a massive difference. Nearly three-quarters (72 per cent) of people who had transferred a DC pension in the past two years did not know what the fees were for their new pension. One in 10 (11 per cent) didn’t think their new pension had any fees or charges.
People who transfer from a lower charging workplace pension into a higher cost retail option may miss out on a staggering 20 per cent of their pension pot by the time they retire. £100,000 on a lifetime pot of £500,000. It could mean three years’ longer at an unpleasant job or even longer to plug the gap caused by their transfer decision. Another huge ticking pensions timebomb?
Too many languish in ignorance. Anyone who moves from a lower charging product to a higher charging product should be informed of that fact. There may be perfectly valid reasons for the higher charges but at least this must be stated on the first page of any documentation.
Perhaps with a warning: 'Do you know this new product costs more than your existing pension product?'
Regulators must act on this now. They are not as effective as they might be with unnecessary and obfuscating overlap. The focus on the value for money in DC workplace pensions is covered confusingly in retail products under consumer duty.
The FCA tells me: “We’ve been working closely with the Department for Work and Pensions and The Pensions Regulator on a new framework for value for money of DC workplace pensions, consistent with the consumer duty, and the FCA will be consulting on proposals shortly.
“The FCA has a new value for money framework for workplace pension schemes high on its agenda. We believe this framework should apply to the whole market, rather than just workplace pensions.”
Is it time to go one step further and join up the dots with just having one pensions regulator for all pension matters?
Stephanie Hawthorne is a freelance journalist
