Poor pension choices could mean years longer at work
High pension charges and the wrong choice of annuity could cut a saver's potential pension income by a quarter (24%), meaning they would have to spend years longer at work to cover the loss, pensions experts have warned.
A report for the National Association of Pension Funds (NAPF) by the Pensions Policy Institute (PPI) revealed that savers who did not get the best deal from these two factors could end up working into their early 70s.
The report looked at how decisions made by savers could affect the pension of an average earner due to retire in 2055 at the age of 68. Factors included paying more into a pension, starting saving earlier, and working longer. Charges and annuities were also explored and are important as they do not involve the saver having to pay any more into their pension.
Charges for stakeholder pensions, which are a common type of workplace pension, are capped by law at 1.5% for the first ten years, then 1% thereafter. But by an employer negotiating a pension with the long-term 0.3% rate offered by some major providers, a saver could increase their income in retirement by 17%.
People who stuck with the higher charges would need to work three years longer to get the same pension as those who benefited from a pension with charges of 0.3%.
The report also showed that converting a pension pot into an income using the lowest rate quoted on open market tables rather than the ‘best buy' could reduce pension income by 12%. To make up for this loss people would have to retire two years later than if they had picked the best rate. Unfortunately, around a third of people fail to ‘shop around' for the best annuity.
Joanne Segars, NAPF Chief Executive, said: "People are not powerless when it comes to their pension. By making the right moves they can get a lot more for their money without having to pay any more in.
"High charges can eat away at a savings pot and both workers and employers should try to keep them down. The annuity system can seem complicated but savers can help themselves by shopping around to get the best possible rate.
"People who don't get the best out of their pension could end up stuck at work for years longer than they planned. Getting a good deal on charges and annuities can mean the difference between enjoying retirement and spending years more at the desk.
"Encouragingly, the report shows there are a host of things people can do to secure a decent pension for their old age. Starting to save into a pension from an earlier age, extending one's working life and increasing pension contributions can all make a big difference."
The NAPF is working with industry leaders, consumer groups, employer bodies and employee groups to find ways of making pension charges more transparent. The group aims to develop an industry code of practice around the transparency of fees and charges, and to make it easier for people to compare pensions.
The industry is also seeking to help savers become more engaged with the annuity process, and the Association of British Insurers is currently undertaking work on encouraging shopping around through the ‘Open Market Option'.
The NAPF/PPI report revealed that saving into a pension from an early age, paying more into it, and working longer could significantly improve an income in retirement.
Through a series of positive choices and factors, an average earner could expect an annual retirement income of £2,200 to be more than tripled to £7,710 (in 2011 earnings terms) on reaching state pension age (68) in 2055. The seven factors and the amount of annual pension income they can add to this scenario are:
A lower charging pension scheme: £630 more
Purchasing the best annuity: £850
Opting into a pension from the age of 30 instead of 40: £990
Paying 1% more in employee pension contributions: £390
Increasing employer contributions by 1%: £390
Working one year after State Pension Age: £550
Annuitising the whole pension pot instead of taking a lump sum: £1,710