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Workers saving for retirement may no longer need to worry about losing touch with multiple workplace pension pots, thanks to a new proposal outlined by Chancellor Jeremy Hunt on Wednesday.
In the Autumn Statement, Mr Hunt has introduced a new “pot for life” system, which would mean employees could be given a legal right to choose their own pension provider, instead of automatically saving into their employer’s default arrangement.
This is part of a raft of pension reforms, which include already-announced measures such as consolidating smaller defined benefit pension schemes, and encouraging pension schemes to invest savers’ pots into higher-risk UK investments.
Together, the Chancellor says the changes will “provide an extra £1,000 a year in retirement for an average earner saving from 18”.
Having more autonomy over workplace pensions could be great news for people who move jobs frequently and have amassed lots of different small pots, which can be expensive and difficult to combine.
This way, it could become much easier for people to stay with one provider throughout their career, and pay more attention to their retirement savings.
But picking the right provider can be a minefield. At this point, it’s not clear which providers will be able to offer this service, but when the choices become clearer you’ll want to consider investment performance, which can vary hugely, as well as customer service, and provider charges.
If your provider charges very high fees it can stop your pension pot from growing as much as it could.
Holly Mackay, of the consumer group Boring Money, said: “Fees and charges are the most popular way in which people filter for Isa and pension products.
“If we move to greater employee choice, employees will want to see and compare fees, to review investment performance, to understand features such as sustainable credentials and – importantly – to read reviews from other employees and users.”
Who are Britain’s biggest pension providers?
Some of the largest pension providers are Fidelity, Legal & General, Now: Pensions, Nest, Aviva, and The People’s Pension.
If you do not make an active decision about where your money is invested, your pension will be invested in a “default” fund. The returns your savings achieve will vary according to your age, as the professional investor managing your funds will generally take more risk with your money if you are younger.
This could mean higher returns when the market is doing well, but much lower returns when it is going through a downturn.
But while the big pension providers may have similar strategies, they can deliver vastly different investment returns. For example, Nest, which is one of Britain’s biggest pension providers, has an ethical fund that has delivered an average 4pc return over the past five years.
But its higher risk fund has delivered 5pc, and its Sharia fund has delivered 13pc. Now: Pensions’ “diversified growth fund” has an annualised return of 7pc over the same period.
Around a quarter of people who are looking for a pension provider want a “build your own” element, according to Boring Money.
If you want to DIY your retirement savings, you could opt for a self-invested personal pension, otherwise known as a Sipp. Most workplace pensions will restrict what you can invest in, but a Sipp will let you choose from a wide range of assets.
The most expensive provider in Which?’s analysis of nine Sipp providers was Hargreaves Lansdown. Savers would pay £1,125 a year for a £250,000 pot, compared to just £156 with Interactive Investor, the cheapest.
Over 15 years, a saver with a £270,000 pot would be £21,700 better off (assuming 3pc investment growth) if they picked a pension with Interactive Investor as opposed to Hargreaves Lansdown.
Interactive Investor’s monthly flat fee of £12.99 (paid on pots worth £50,000 or more) makes it far cheaper than its competitors – particularly for those with bigger portfolios.
One of the cheapest Sipp providers is Vanguard, with a holding fee of just 0.15pc, capped at £375 a year for accounts worth more than £250,000.
A Sipp allows you to choose exactly how your pension is invested. Every spring, we pick our favourite funds for the year – our guide reveals our picks for 2023.
We aim to pick funds that can stand the test of time – for a “get rich slow” strategy, we like the Personal Assets investment trust, Vanguard’s LifeStrategy fund range which invest in a mix of global stocks and bonds, and Ruffer Investment Company.