Switching pensions has lost people £1.7bn this year

Many people are unknowingly moving to pension schemes with higher charges or worse benefits, experts warn

Losses from switching pensions are projected to hit £1.7bn this year as an increasing number of savers unwittingly move to schemes with higher charges, research has found.

Pension transfers are where you switch your defined contribution (DC) pension – a pot of money you save up for retirement – from one provider to another.

You may want to transfer your pension for a number of reasons, such as to move to a scheme with lower fees or to consolidate your pots into one place to manage them more easily.

Many experts also say that pension transfers can help people take control of their retirement savings, with some providers even offering cash incentives to switch to encourage people to engage with their pensions.

But new research from People’s Pension, shared exclusively with The i Paper, has found that many people are unknowingly moving to schemes with higher charges or worse benefits, leaving them worse off in the long-term.

It projected losses from these transfers could hit £1.7bn in the year to June 2025. That’s up by £500m from the £1.2bn estimated to have been lost in 2023 and an increase of nearly £1bn from the £792m lost in 2020.

People’s Pension, one of the UK’s biggest pension providers, said the risk of financial loss from pension transfers is increasing by around 22 per cent per year and could hit multi-billions by 2027.

Its research looked at the financial impact of transferring into higher-charging schemes and the rising volumes of transfers, and conducted qualitative interviews with pension savers.

Pension schemes charge fees to cover the costs of running the scheme and managing your investments. But high charges can eat away at your pension savings, leaving you worse off when you come to retire.

For example, if you had a pot worth £30,000 with an annual management fee of 0.25 per cent, you would pay £75 a year, whereas a 1 per cent annual management fee would cost you £300 a year.

People’s Pension also conducted a poll which found that 53 per cent of pension savers said they don’t actually understand how a transfer works.

The findings come as the Government is concerned millions of people are under-saving for retirement, with retirees in 2050 expected to be £800 a year worse off than those retiring today.

Patrick Heath-Lay, chief executive of People’s Pension, said: “It’s alarming to see such a rapid escalation of the pension transfers problem, which is fast becoming a crisis – especially when you consider the significant impact on people’s retirement savings.

“Savers risk ending up with thousands of pounds less and working for years more. With massive rises in transfer volumes expected when pensions dashboards come into effect, it is essential that the industry acts now to address this issue.”

Pensions dashboards are an online tool being built by the Government and the pensions industry that will allow people to see all their pensions in one place.

Mr Heath-Lay said that pension savers must be able to easily access and compare all the information they need to make informed transfer decisions in order to prevent increasing losses.

People’s Pensions’ poll found 96 per cent of savers think providers should have to explain the impact of all the charges they will pay if they transfer to a new pension, which they are not currently required to do.

Mr Heath Lay added: “More onus must be put on providers to flag to members when they are transferring to higher charging schemes to ensure members understand the long term implications.

“With so many people under-saving for retirement, it is unacceptable for savers to be losing out by making uniformed decisions like this.”

What to check before transferring your pension

Before transferring your pension to another provider, make sure you double check what your current charges are compared to what you’ll have to pay with your new provider.

You may have to pay an annual management charge, which is the fee the provider charges for managing your pension investments – but there may also be other fees attached.

According to MoneyHelper, some older schemes may have exit charges attached, too, although if you joined a scheme after March 2017, these won’t apply. Schemes usually can’t charge more than 1 per cent if you transfer out before 55.

It’s also a good idea to ask your current pension if there are any valuable benefits attached that you could lose by switching.

For example, some schemes allow members to take their pensions at a lower age than the typical retirement age. By switching, they could lose this benefit.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, added: “Anyone thinking about switching should consider the overall value they’ll get from their new provider.

“Find out what retirement options they offer, their range of investments, their web and app offering, the interest you’ll receive on any uninvested cash, what their customer service is like, and what sort of education and research they provide for their clients.”

Steve Webb, former pensions minister and partner at LCP, added: “It can be very hard for people to compare different pensions, but if you are moving from a large scale, low cost and well-governed workplace pension into a ‘retail’ product available direct to the general public, you are often going to be paying more. 

“It is important to take your time when considering combining pensions to understand what exactly you are trying to achieve and to make sure you understand the pros and cons of different offerings.”