UK savers are being enticed with offers of free money, amounting to hundreds or even thousands of pounds, to sign up with new digital pension consolidators in a trend raising concerns among some financial experts.

A wave of online-only pension companies has been launched in recent years, all vying for a slice of the £1tn retirement savings market.

At least eight companies have emerged since 2012 offering online pension tracking, pooling and investment services. They now command more than £8bn of pension savers’ cash, with at least 300,000 active customers, according to a Financial Times survey.

This new breed of pension companies aims to attract savers who want a slick digital offering and a hassle-free service to bring all their pensions into one place.

But experts say that savers lured by one-off cash offers to switch to a digital personal pension provider risk being left worse off if they are not careful to check charges or valuable benefits on existing pensions.

FT Money sets out what you need to know about consolidating your pensions.

What are the digital pension companies offering?
You may be familiar with household names such as Scottish Widows, Aviva and Standard Life, some of whom have been selling pensions for more than a century. But in the past eight years, newer players in the pension market have emerged, such as Raindrop, Penfold, PensionBee, Moneyfarm Wealthify and Moneybox.

These digital-only providers typically promote services which will conveniently track down old workplace and personal pensions and bring them together into one new, flexible online retirement plan. Other innovations include products for particular segments of the workforce. This year, Raindrop, established in 2020, and PensionBee, which launched in 2014, both introduced new individual pensions squarely targeted at the self-employed and their need for flexibility around contributions.

Plum, a money management app, in June launched a self-invested personal pension (Sipp) that eases pension consolidation and integrates with the digital money management tools on its app.

Younger savers are the key audience for these new fintechs. “A high-tech offering is important when it comes to attracting new business from under-45s, who are the most likely to expect to have the option to access their pension via an app and value online tools and calculators,” according to a 2021 report by Mintel, a market research firm.

Holly Mackay, founder and chief executive of Boring Money, a financial consumer website, argues that there is a lot to be said for consolidation services provided by the new breed of pension services, and that she did not think the likes of PensionBee and Wealthify could be directly compared with workplace pension plans.

“These newer services offer more than a product — they engage, they teach and they inform too,” says Mackay. “We’re also far more likely to take our pensions seriously by the time they represent one year’s salary rather than small bits and pieces everywhere. So there are lots of things to like about the newer providers.”

They also offer tempting deals to entice savers to join. Penfold, which launched a pension for the self-employed in 2019, offers up to £1,000 cashback for transfers in, depending on the size of the fund.

PensionBee offers transfer incentives such as cashback and free pension contributions. It will also give customers, and their friends, a £50 pension contribution for every friend that signs up. Moneyfarm, a digital wealth management business, has an ongoing promotion where there is a reduction in fees for a “refer a friend” programme.

In October, Wealthify ran a promotion where new and existing customers could earn up to £200 cashback when transferring one or more pensions.

How are these personal pensions different from a workplace pension?
To the untrained eye, all pensions might look the same. But underneath the bonnet there are crucial operational differences which could potentially affect the size of your eventual pension pot.

First, a workplace pension is chosen by your employer, which has a duty to make sure that it is suitable for the workforce and complies with the rules on automatic enrolment.

Significantly, pension funds used for automatically enrolled workers can charge no more than 0.75 per cent in annual management fees and are monitored by governance arrangements comprising either trustees with legal duties to keep a check on your pension or an independent governing body.

This charge cap excludes transaction costs levied by fund managers when they trade assets on your behalf. In a 2021 review of the charge cap, the Department for Work and Pensions noted a recent study found that the majority of the total transaction costs fall within the range of -0.1 per cent to +0.1 per cent. Transaction costs can be negative when the trade undertaken by the asset manager swings in their favour.

“Most workplace pensions offer lower charges than individual policies; typical charges that we see for workplace defined contribution schemes are between 0.25 per cent and 0.50 per cent — this does include all charges and what we would refer to as the total expense ratio,” says Mark Futcher, partner at Barnett Waddingham, a professional services firm.

“This means that members pay between 25p and 50p per £100 invested. These are very low charges and cover all of the costs of the pension arrangements, such as investment charges, administration, communication material, online digital services, compliance and governance.”

A caveat applies to some smaller workplace plans, of less than 100 members, for example, and older retirement plans that were set up before 2012. These are likely to levy annual management charges near to, or higher than, the 0.75 per cent charge cap. Around 14 per cent of assets in legacy or older style pension schemes still attract charges above 0.75 per cent of assets under management.

The long-term impact of poor consumer choices in personal pensions was highlighted this week when the Financial Conduct Authority unveiled proposals to reduce the risks to new pension customers who did not have the help of an adviser. It plans to force firms to offer ready-made investment solutions for new customers and to send customers holding large amounts of cash warnings about inflation — but it did not propose extending the charge cap in workplace pensions to those outside the workplace.

Fintech personal pension providers
Name Established Assets under management Customers (invested)
Moneyfarm 2016 £1.8bn 55,000
PensionBee 2014 £2.25bn 104,000
Nutmeg 2012 £4bn 160,000
Penfold 2018 £44m Did not disclose
Collegia 2018 Launched in Sept 2021 1500
OpenMoney 2015 £150m 18,000
Moneybox 2016 >£2bn Did not disclose
Wealthify 2016 Did not disclose 60,000
Raindrop 2021 Did not disclose Did not disclose
Source: FT research

What are the charges on personal pensions?
When someone sets up a personal pension they must typically choose an investment strategy, but they do not have the benefit of a charge cap, nor are they required to have a layer of independent governance, though some do.

These pensions are often targeted at self-employed or independent contractors without access to a workplace scheme; but they also appeal to individuals who want a slicker, more convenient and digitised way to manage their money than their existing pension provider can offer.

Personal pension charges vary depending on whether you have a Sipp (with a wider range of investment choices) or a personal pension and the type of fund you select.

Most providers will quote an annual management fee, without including transaction charges. The Raindrop Pension Account is currently 0.75 per cent a year. Wealthify, backed by Aviva, one of the largest providers, says its annual management fee is 0.6 per cent, not including investment costs.

On its main funds, Penfold charges 0.75 per cent on the first £100,000 of the account balance and 0.45 per cent on the portion over £100,000. PensionBee’s fees range from 0.5 per cent to 0.95 per cent for specialist plans, with 50 per cent off on amounts over £100,000.

Moneybox, which offers Sipps, charges an annual fee of 0.45 per cent for pension pots up to £100,000. Anything above that amount will be charged at a fee of 0.15 per cent. Fund provider fees are additional.

To pension savers, these differences may appear small, but they matter in the long term. “Over time, charges can make a huge difference to your returns,” says Money Helper, the government’s financial guidance service. “Even relatively small differences in ongoing costs can add up over time.”

The traditional providers of personal pensions levy comparable charges. Aviva, for instance, charges 0.7 per cent for its personal pension, with additional manager fees for investment funds. Scottish Widows levies a service charge of 0.9 per cent on the first £30,000 of retirement money held in its personal pension, with this fee gradually reducing for amounts above the £30,000 threshold. In addition, there are investment fees.

But I like the sound of consolidating my pensions in one place. Are there other things I need to worry about?
Combining your pensions into one simple plan, using a consolidator, has big advantages in terms of managing your money and checking how it is growing. But experts say you should proceed carefully (see below), particularly if you are an active saver in a newer-style automatic enrolment workplace scheme with low charges and active governance.

Christine Ross, client director at wealth manager Handelsbanken Wealth & Asset Management, says it is “rarely a good idea” to opt out of a workplace pension to start saving in a personal pension.

“Those who have accumulated a number of workplace and personal pension arrangements often consider consolidating all into one scheme,” says Ross. “This might feel ‘tidier’ but can come at a cost. It is worth considering whether the potential for reduced administration and wider investment choice is really worth it.”

What do you need to think about before transferring a pot to a new company?
You should check first whether any older pensions have any special features or safeguarded benefits you could lose by moving to a new provider. Will you need to pay charges to move them?

Many pensions taken out before April 2006 include an option to take more than 25 per cent as a tax-free cash lump sum, while certain older plans may come with guaranteed annuity rates (GARs) that promise income considerably higher than that currently available on the annuity market.

Some pension plans have a protected age of 55, which means if you transfer to a new plan you may have to wait longer to access your cash, since the normal minimum pension age is rising to 57 in 2028.

If you have small pension pots worth less than £10,000, it might be better to keep them where they are. This is because taking small pots of less than £10,000 from workplace or personal pensions will not typically trigger the money purchase annual allowance (MPAA), where the annual allowance is slashed from £40,000 to £4,000. If you consolidate a smaller pension pot, you will lose this flexibility and risk a drastic cut in your future tax-free pension saving potential.

Mackay says: “I’m always a bit suspicious of cashback offers. In the long run it’s much better to choose a provider with sensible charges for your account, with tools and reporting which will put you in the driving seat and keep you informed, rather than chase £50 but end up somewhere that is potentially not well-suited to your needs.”

What do these personal pensions do to protect me from a bad move?
Most pension providers, including the traditional players, will provide customers with guidance on the pros and cons of combining pensions. But with so many incentives on offer from digital providers, it is more important for savers to look beyond free cash or other promotions to ensure pension consolidation is right for them, if they are not using an adviser.

PensionBee says it alerts customers of any benefits or exit fees (over £10) in the scheme they intend to leave. “If we find one then we immediately notify the customer and they must take action to agree that they want to give up this special feature or benefit upon moving to PensionBee. We can only proceed with the transfer if the customer explicitly agrees that they want to give up this feature or benefit.”

Penfold says: “We always advise customers to check transfer fees from their previous providers and we do not accept transfers from pensions with any valuable benefits. Our team manually checks for these before processing a transfer.”

Wealthify says it will not accept transfers from pensions that have special features. In spite of these measures, savers are moving their pots to higher charging schemes.

Nest, the government-backed workplace pension scheme with 10m savers, says every month a proportion of transfers out of the plan go to pension schemes with higher charges than Nest. “Technology is making the transfer journey easier, but savers could be transferring their pots without evaluating whether this is in their best interests,” it said.

To consolidate or not

Bringing your pensions together into one new online plan makes them easier to control and monitor. But consolidating is not straightforward and there are some situations where it makes more sense not to move, experts say.

In making the decision, a good place to start is to identify whether your old workplace plans fall any of these categories.

  1. A new-style auto-enrolment plan into which you receive ongoing employer’s contributions 

  2. An old-style pre auto-enrolment plan into which you receive ongoing employer’s contributions

  3. New style scheme, but paid up with no ongoing contributions

  4. Old style, but paid up with no ongoing contributions.

In the first and second cases, Jason Butler, a financial expert, says you are most likely to be better off retaining the workplace plan, regardless of charges. To transfer to a fintech consolidator you’d have to opt out of the scheme and as a result would lose the benefit of the free money that is the employer’s contribution. This would be a minimum of 3 per cent of pensionable earnings but could be higher.

In the case of number 3 the case for transferring is also not as strong, due to the fact you may still be benefiting from low charges.

“For example, Nest, used by many smaller employers, charges an all-in fee of 0.3 per cent a year compared with between 0.5 and 0.9 per cent or higher by the fintech consolidators,” says Butler.

“So if you have an inactive Nest plan it won’t hurt to leave it where it is. The charges are very low and there is a good chance a future employer will choose Nest to receive their contributions, and they will go to your old account.”

A consolidation plan with a fintech makes most sense, he says, when savers have lots of relatively small old money purchase plans, no Nest pension, and their workplace pension is charging higher costs or does not offer their preferred investment options.

Ross at Handelsbanken says it is “certainly worth” considering pooling pensions when you are soon to begin drawing on your pension, if your workplace plan does not offer flexible ways to take your cash.

The timing matters because if you are at the point of retirement, or wanting to draw on your cash, your considerations extend beyond investment performance and charges to how you can get your cash. It may not be sensible to transfer to a higher charging personal pension provider, for more flexible drawdown options, if you are still a few years away from this.

Weekly newsletter

For the latest news and views on fintech from the FT’s network of correspondents around the world, sign up to our weekly newsletter #fintechFT

Sign up here with one click

Butler adds that savers should consider other investment options for their pensions. Vanguard, for instance, has a maximum platform charge of 0.15 per cent on the first £250,000 (nil on higher balances). 

“Their extensive fund range costs between 0.05 per cent and 0.60 per cent, with their LifeStrategy fund range charged at 0.22 per cent,” he says. “Bearing in mind you can’t access advice from them even if you want or need it, the fintech consolidators are still charging too much.”

This article has been amended to clarify Wealthify’s fees

Get alerts on Pensions when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section