Workplace pension scheme members could be losing out on around £1.7bn a year during their transition into and in retirement as a result of choosing costly pathways to access their money, research from HSBC Tomorrow Master Trust has revealed.

The research, which was undertaken by Bayes Business School in association with Hymans Robertson, found that while some of this loss comes from tax penalties faced when withdrawing more than the 25 per cent tax-free lump sum, many savers are potentially buying products that are not the optimal solution.

The report, Converting pension pots into retirement incomes: Are current roads delivering member value?, noted that most single employer, contract and master trust schemes are not offering in-scheme retirement solutions, in turn forcing members to 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 (TPR) to a retail environment under Financial Conduct Authority (FCA) rules.

The report argued that this lack of ownership from governing bodies leaves members open to risk and erosion of value, while no longer being protected by the fiduciary and value oversight responsibilities of employers and trustees.

Indeed, based on FCA data, it estimated that £1.7bn 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.

Such behaviours include withdrawing pension funds as a single lump-sum when multiple withdrawals might reduce the tax payment, paying for annual advice when fund size might suggest this wasn’t needed, and moving pots to another provider to access a drawdown product, which can result in transfer fees and different annual management charges.

Commenting on the findings, Bayes Business School professor of asset management, Professor Andrew Clare, stated: “As members transition into retirement, current pathways can erode the real value of pension savings that took a lifetime to accumulate.

"And when schemes abandon them at this critical time in their lives, they are exposed to risks that they are often not equipped to face alone.”

Adding to this, HSBC Tomorrow Master Trust CEO, Alison Hatcher, argued that pension savers need "good value solutions that can fit into their lives and work for them".

"The friction, cost, and risk that members face as they enter retirement for the first time is a significant issue that is often forgotten or ignored," she continued.

"There is a major real-term impact that members are exposed to during this crucial moment in their lives and we need to find ways to fix and enhance value in this area. Our vision is focused on innovation with an absolute commitment to serve the evolving needs of employers, pension savers and retired members.

"Part of that includes a joined-up financial wellbeing and pensions journey for members, including a holistic retirement savings and benefits platform which is digital but backed up by personalised support.”

Hymans Robertson partner, Kathryn Fleming, added: “The reality is, many individuals with small pots wanting to convert their plans into a regular income do not have sufficiently complex needs to warrant full adviser charging.

"Guidance or low-cost advice propositions in conjunction with the ability for individuals to leave their DC pots invested in cheap, well governed employer-sponsored products are likely to lead to much better retirement outcomes for many individuals.”

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