How do we service retirement that delivers value and manages risk for the mass market?

by | Dec 24, 2022

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By Alison Hatcher, CEO of HSBC Tomorrow Master Trust

Ten years on from the introduction of auto-enrolment, member savings are growing exponentially. While there’s still a lot to do to get these savings up to a level where members have enough to retire with, this is an undoubted foundational success to improving the growth phase of the accumulation journey.

However, when the time comes to convert these hard-earnt savings into an income, the traditional DC model is causing members to lose around £1.7 billion a year as they transition into retirement, according to independent research from Professor Andrew Clare of Bayes Business School.

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.


Traditionally a member’s approach to entering retirement has been to:

  1. Come out of an occupational pension scheme,
  2. Consolidate wealth,
  3. Speak to an adviser,
  4. Buy an annuity or utilise cash.

However, the rise in drawdown purchases (24%) nearly doubled compared to annuity buys (13%) in 2021/22 (source: Financial Conduct Authority), opening up new challenges for the market, according to Professor Clare.

His research, which was commissioned by HSBC Tomorrow Master Trust, finds that transitioning to another provider for an actively-managed drawdown plan can cost members up to 82% of their first annual retirement income (or slash pot longevity by nearly a year), due to annual management charges (AMCs) and transition fees.


With government and industry bodies saying we all need to save more if we want to retire comfortably, not only can savers not afford such loss in value, it’s becoming clear that the needs of individuals are evolving.

As more people save for their retirement and buy drawdown plans, what does the future model look like, and how can we work better together to service our clients?

Why removing friction and risk points at retirement is important

As it stands, most DC members within occupational pensions, who want to access their pension pot must transition from an occupational scheme to a retail market, requiring transfers in and out of funds and new fee structures, as well as a very real risk of pension scam exposure. 


As an example, Professor Clare’s research found that a baby boomer with a pension pot worth £35,000, who buys an actively-managed drawdown plan from a third-party provider would receive £779 in their first year of retirement.

However, they would be faced with £639 (82%) in transfer fees and AMCs as they enter retirement, either leaving them with just £140 left during their first 12 months or cutting the length of their overall retirement income by nearly a year.

Comparatively, if the same baby boomer were able to convert their savings in-house, they wouldn’t need to pay a transition fee and only face £87 (11%) in AMCs – a saving of £552.


In this scenario, Professor Clare’s research also reveals that the odds of running out of money by age 90 go down to 25/1 if a member can convert their savings in-scheme compared to 6/1 if they need to find another provider.

These figures are based on a 4% annual withdrawal, with a typical AMC of 2% and a 0.8% transfer fee to buy an actively-managed drawdown plan compared to an AMC of 0.35% and 0% transfer fee if the member can convert in-scheme (data provided by independent financial consultant Hymans Robertson).

Finally, the research goes on to find that savers across all the age groups analysed are likely to make considerable savings in fees if they are members of Master Trusts that offer in-scheme drawdown solutions – leading to healthier incomes and improved pot longevity.

Looking ahead


This year, the Department for Work and Pensions (DWP) launched a consultation on decumulation, to find new ways to support savers when they access their pension pots.

Concurrently, the Pension and Lifetime Savings Association (PLSA) reported their encouragement that an increasing numbers of Master Trusts are either already offering or currently developing retirement solutions, which they “feel more adequately cater for retirees”.

As a result, more employers are considering sign-posting their pension scheme members to Master Trusts at the point of retirement. No surprise when you consider that it’s a service that costs them nothing, while enhancing their benefits package for employees.


Going forward, Master Trusts could also be used as an alternative tax-efficient pensions savings vehicle for individuals. For those who have under £200,000 in savings, this could be a great value route to a drawdown solution – and with a 66% uplift in drawdown products in 2021/22, offering variety to meet consumer needs is now essential.


Master Trust membership went up 10% last year (source: The Pensions Regulator) and they’re set to take a 40 per cent share of a £1.1tn market by 2029 (source: Broadridge). Professor Clare’s research indicates this is on track, as they’re already more likely to deliver better value drawdown solutions for members retiring now and in the future – due their size and ability to deliver scale efficiencies.

But member value isn’t just about saving money. Members need innovative investment solutions that are well-thought out and target their needs. They also need help and support, wherever they are in life – from paying off debt in their 20s to finding how best to utilise their funds in retirement. It’s why the structure of a Master Trust can now be considered as another retirement solution, alongside SIPPs, with features that can fit saver needs.

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