Should we be switching in the dark?

It’s not the headline you want to read if you’re a regulator trying to find a common definition of value for money. Nor is Pension Expert’s strap-line.

More than four in 10 pension holders surveyed by B&CE said they would not know what to look for when switching pension providers.

There is a disconnect between the two statements. It may be that the people who don’t know what to look for when switching pensions aren’t the people switching pensions. It maybe that the people switching pensions know why.

Thinking about it, why (logically) would you switch pensions in the dark? It is a very time consuming business and it’s expensive – switching isn’t free despite what the adverts tell you.

You would only switch your pension pots if you felt that good would come of it. How you define “good” is up to you. You might want to have your money managed as mattered to you, you might want to improve the return on your money by focussing on costs and performance, or you might just want a better quality of service than you’d been used to. Whatever your motivation, you’d need to have a degree of conviction before you transferred.

Perhaps the exception to this is where advice is being taken, where you can outsource decision making to someone you pay to make good decisions on your behalf. Of course you are already paying once (to your pension provider) but paying twice may seem like a good idea if you’ve given up on ever being able to sort the pork from the spam.

Sorting pork from spam is a real problem for people. The B&CE (People’s Pension) research suggests that people know what they should be looking for.

B&CE’s research found that saving money on charges would be a factor in switching their pensions provider for more than a third of pension savers, while 34 per cent would be encouraged to switch provider by a pension fund’s advertised rate returns.

Twelve per cent of those surveyed would weigh up changing to a company with a superior website or app.

People do still think of pension saving as a matter of what you pay for it and what you get which is broadly speaking a value for money formulation. They use the shop window as a proxy for quality of service and why not.

There is no published table , from the Government or elsewhere , that ordinary people can refer to in deciding who is cheapest, who offers the best rate and – in the absence of any better indicator – flash websites may well win the day.

Online pension scammers – feel happy.

This is the point that is being made in Australia. It is all very well saying that we should take advice and leaving decisions about combining pensions to experts, but most of us can’t afford to take advice, which – on matters such as this – will cost more than the perceived benefit. A notable example of the difference between what Government intended and what happened is the failure of HMRC’s initiative to make the employer provision of financial advice a tax-free benefit in kind

From 6 April 2017, Section 308C ITEPA 2003 introduced a statutory exemption of £500 in a tax year for relevant pensions advice provided to employees. Under this exemption, if an employer provides pensions advice to its employees, or pays or reimburses the costs of pensions advice incurred by the employee, the cost of this advice is exempt from Income Tax up to £500 in a tax year,

It was thought that this would democratise advice, it didn’t. Advisers couldn’t provide advice within the £500 exemption and in any event this looked to all parties as solution in search of a problem.

I’ve been thinking a lot about what the problem that £500 payment could be solving. I suspect that many employers would be prepared to offer a tax-free benefit in kind if they could see good reason.

Perhaps the Government should be thinking about encouraging people to get the information and support they need to combine their disparate pots, by promoting this under-used but valuable tax-break, to a more specific audience, namely people looking to organise their financial affairs prior to retirement, with the help of information that mattered to them – specifically on costs, performance and quality of service.

However the employer wished to structure this – from full subsidisation to  simply making the facility available without subsidy, the outcome of the £500 service would need to be demonstrably better than had the £500 not been spent. There appears to be a market opportunity here, but it will require a reformed market.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Should we be switching in the dark?

  1. Ant Donaldson says:

    From my experience, many people simply want their pension money in one place, often in their current employer’s scheme.

  2. henry tapper says:

    Thanks Ant; the importance of workplace pensions in this is huge; it’s really in the hands of employers and their workplace pension providers – to promote their workplace pension schemes. I wish they did this more!

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