We’re taught from an early age not to accept sweets from a stranger, but that bit of common sense seemingly goes out the window when we’re offered £100 from a financial company.
Banks, investment platforms and pension companies are all using cash bonuses to entice new customers into deals – and for good reason, because it works like a charm.
Savers are 20 percent more likely to switch pension providers if they have been promised a cash reward – even if it leaves them thousands of pounds worse off in the long term, a new study has found.
An experiment with 5,500 people for the People’s Pension by the consultancy Behavioral Insights Team (BIT), shared with The Mail on Sunday, found that the pull of a financial incentive is so powerful that savers are more likely to be blind to the negative consequences of a agreement.
One in three people who were shown an advert promising £100 to those who switched pension providers agreed to do so, despite it leaving them £1,111 poorer over the next five years. With the bright prospect of ‘free’ cash, savers will be less likely to ask questions and educate themselves before making a decision, the BIT found.
Banks, investment platforms and pension companies are all using cash bonuses to entice new customers to sign deals – and for good reason, because it works great
In some cases, savers can benefit from the incentives if they encourage them to take out products that offer a good price. However, this sneaky advertising tactic is also being used by pension providers to entice new savers into deals that could charge higher premiums, warns the People’s Pension – one of Britain’s largest pension funds.
In many cases, these companies benefit from the complex nature of pension costs, which are difficult for the average saver to estimate.
But hidden costs in pension transfers can wreak havoc on pension savings. A seemingly small difference in fees can cost tens of thousands of dollars over decades. For example, transferring a £50,000 pension pot from a provider charging 0.4 per cent to a provider charging 0.75 per cent could result in a shortfall of more than £70,000 over a thirty-year career.
In the BIT experiment, all participants were told that their current, hypothetical pension provider charged 0.5 percent and grew at 5 percent per year by investing in a basket of shares of global companies.
They were then randomly shown one of four adverts: one offered £100 to those who switched pension providers, another promised six months free, one said the transfer would help the planet, and a final advert said switching your retirement would make it easier. so you can manage your money.
Anyone taking part could click to find out more about the new pension, where they were told the pension provider would charge 0.925 per cent in fees to those who responded to the cashback offer and 0.875 per cent to those who responded to non-cash incentive advertising. . Both pensions delivered an investment growth of 5 percent per year.
This meant that anyone who responded to the ad would be worse off in the long run, as they would be charged more than the current rate of 0.5 percent.
Of the four adverts, the £100 cash incentive overwhelmingly received the best response, with one in three saying they would take up the offer.
But taking the carrot came at the biggest cost, with an additional cost of £1,111 after five years. Those who made the transfer based on the six months free offer would still be £1,069 less compared to if they left their pension where it was.
Patrick Heath-Lay, CEO of the People’s Partnership – the provider of the People’s Pension – says the research shows how damaging financial incentives can be in the pension transfer process. He says: ‘They act as a barrier to people thinking about what is on offer and whether it is value for money.
‘People are also less likely to read and understand the basic details about their new pension, even if it is prominent and they stand to lose money.’ He says consumers are vulnerable to these underhand sales techniques and that the industry is not doing enough to make the transfer process transparent and comparable.
Mr Heath-Lay warns: ‘The transfer market is too stacked in favor of pension providers, rather than in the interests of consumers. This needs to change urgently.’
Ruth Persian, head of the financial behavior team at BIT UK, said: ‘Pensions are complex and often confusing.
‘Our experiment shows that ads promoting incentives such as free money offers for transferring pensions can lead pension savers to ignore costs and other important information and opt for products with poor value.’
It is essential that you look carefully at the fees charged by pension providers before making any big decisions about where to invest your money. Standard pension funds that your employer has affiliated you with cannot charge more than 0.75 percent, but others can charge more. Even when you retire, it is important to look carefully at the loading structures.
According to consumer group Which?
Some older pension policies charge 1 percent in fees, while newer pensions typically charge between 0.4 and 0.7 percent.
This also applies to regular savings accounts and Individual Savings Accounts (ISAs), where there can be hidden benefits behind attractive transfer bonuses.
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