New research from HSBC Tomorrow Master Trust shows workplace pension scheme members are losing around £1.7 billion a year during their transition into and in retirement, due to savers choosing costly pathways to access their money.

While some of this loss comes from scheme members withdrawing more than the 25% tax-free lump sum, exposing them to hefty tax penalties, many are potentially buying products that are not the optimal solution for their circumstances.

The research was commissioned for a report Converting pension pots into retirement incomes: Are current roads delivering member value? by HSBC Tomorrow Master Trust and undertaken by Professor Andrew Clare of Bayes Business School, in association with Hymans Robertson.

The report focuses on the current dilemma of most single employer, contract and master trust schemes in the UK not offering in-scheme retirement solutions, which forces members to go it alone and seek out third-party providers to convert their pension pot into an income.

This means that pension scheme members who transfer out in order to take retirement benefits generally move from an accumulation journey regulated by The Pensions Regulator to a retail environment under Financial Conduct Authority rules.

This lack of ownership from governing bodies leaves members open to risk (i.e. pension scams) and erosion of value (that has taken decades to grow), while no longer being protected by the fiduciary and value oversight responsibilities of employers and trustees.

As a result, and based on Financial Conduct Authority (FCA) data, HSBC Tomorrow Master Trust and Hymans Robertson estimates that £1.7billion in pot value is lost each year due to a large cohort of individuals exhibiting sub-optimal behaviours when accessing their pensions for the first time. These include:

Withdrawing pension funds as a single lump-sum when multiple withdrawals might reduce the overall tax payment;
Paying for annual advice when fund size might suggest this wasn’t always needed; and
Moving pension pots to another provider to access a drawdown product, which can include transfer fees and different annual management charges (AMCs).

Taking each point, most recent FCA data for 2020/21 shows 705,666 people accessed their pension pots for the first time – a rise of 18% on the previous year – with more than half (56%) taken as a single lump sum. Out of these, over 10,000 were made without financial advice taken beforehand.

Drawdown purchases saw an increase of 24% and over half (54%) of those worth under £50,000 took place with financial advice provided to the savers.

While sales of annuities rose by just 13% in 2021/22, Hymans Robertson research shows that around half of DC pension schemes point members towards annuity broking services. However, virtually none offer in-scheme drawdown solutions.

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