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Savers opting to transfer their defined benefit pensions face record high charges, which could lower their retirement income by thousands of pounds, according to new analysis.

Since 2015, individuals who wish to transfer a defined benefit pension to a riskier personal pension plan must first obtain advice from a specialist

In recent years, more than 200,000 savers have transferred their future defined benefit (DB) pension benefits to a personal pension, many attracted by securing full control over access to their cash in these arrangements but also the tax-advantaged death benefits.

But a new survey has found savers seeking transfer advice today pay record amounts in fees when the DB cash lump is eventually invested, which are ultimately reflected in lower retirement returns.

According to market analysis by XPS, a pension administrator, members transferring in the year to March 31 faced average annual ongoing costs of 1.9 per cent to keep their fund invested compared with 1.7 per cent the year before. This was the highest level since the XPS survey began in 2018.

Mark Barlow, head of member options with XPS, said the increase may be due to transfers being made to more expensive receiving schemes.

“The survey revealed that 99 per cent of members transferred to a self-invested personal pension (Sipp),” said Barlow.

“These range in sophistication and complexity, with fees ranging from as low as 0.7 per cent to over 3 per cent (including ongoing financial advice). Some vehicles that can also be lower cost, such as workplace pension schemes or master trusts, are not routinely considered by members.”

Rules require a DB pension fund to be transferred to another pension arrangement, such as a self-invested personal pension, which has wide investment choice, to a simple personal pension or a group pension.

These benefits can also be transferred to a workplace “defined contribution” pension, which are typically cheaper than Sipps, or personal pensions, because of a 0.75 per cent cap on annual charges for occupational schemes.

According to XPS, the difference between charges for the most expensive and cheapest “receiving” schemes it uncovered for its analysis could result in a pensioners paying an extra £8,500 a year in fees.

Becky O’Connor, head of pensions and savings, with interactive investor, the DIY investment platform, said: ongoing percentage charges eat away at life savings.

“The impact of fees on pension pots is so important to retirement outcomes but poorly understood, because providers are not always very transparent,” said O’Connor.

“Unfortunately, the result for some people of paying high percentage fees will be a far reduced retirement income for the rest of their lives. They run the risk of running out of money much sooner than they would have done with a better value pension.”

The XPS survey also found that the numbers of individuals transferring over the year to the end of March was down by 23 per cent, probably due to the impact of the Covid-19 pandemic lockdown.

However, the average transfer value had increased by 29 per cent to £375,000. This rise was driven by members with the largest values choosing to transfer their pension. For its analysis, XPS drew on data from 11,700 transfers, worth more than £3bn, which its team had processed during the year to March 31 2021.

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