Is Your Drawdown Provider Costing You?
July 22nd, 2015
A recent article by Citywire has caught our attention highlighting the differences in charges between providers for accessing you money via drawdown.
“A report by consumer group Which? has looked at the cost of putting money into drawdown in retirement. Drawdown is where money remains invested and an income is taken from the pot each year. Which? looked at the fees charged for accessing money in drawdown at 18 companies.
In its first example of a pension pot of £50,000, the retiree takes 4% of the fund a year. The research found a retiree could lose out on as much as £3,000 over 10 years if they used the most expensive provider versus the cheapest.
The most expensive in this case was The Share Centre, which charged £8,100 over the decade to access cash, and the cheapest was Fidelity which charged £4,991 over the same time period.
For someone with a larger pot of money – £250,000 – withdrawing 6% a year, the savings over a decade between the expensive and cheapest meant retirees could lose out on up to £10,000 over a decade.
The most expensive policy in this example was Scottish Widows which charged £26,490 over 10 years for accessing pension funds and the cheapest was LV= at £16,325.
The following table calculates the costs based on a pot of £250,000, withdrawing 6% of the fund a year and pension growing by 5% per year. It also includes fund management charges – Which? has used the Henderson Cautious Managed fund as an example.
|Company||Cost over one year||Cost over a decade|
|Alliance Trust Savings||£1,966||£18,155|
|AJ Bell YouInvest||£2,035||£18,815|
|The Share Centre||£2,467||£20,597|
|Charles Stanley Direct||£2,636||£22,536|
|TD Direct Investing||£2,724||£24,031|
Which? said that many pension providers did not offer drawdown plans, meaning retirees would have to switch to a pension provider that did. However, there is no clear comparison of drawdown policy fees and myriad costs that can be imposed, making it almost impossible for a retiree to tell whether they are getting a good deal.
Which? chief executive Richard Lloyd said: ‘The old annuity market failed pensioners miserably and the government must ensure the same thing doesn’t happen again with drawdown. With such big differences in cost, and confusing charges that make it difficult to compare, it’s clear more needs to be done to help consumers make the most of the [pension] freedoms.’
Of the 18 companies that responded to the survey sent by Which?, six of them charge to set up a drawdown plan, seven charge an annual fee for using drawdown, and eight charge an annual fee if you have a self-invested personal pension (Sipp). Another seven charge a simpler, single annual ‘platform fee’ but there can be extra charges on top such as fees for certain types of investments.
A cost cap on auto-enrolment pension schemes was implemented by the coalition government and Which? has called for a similar cap to be placed on drawdown charges. It also wants a cap placed on exit charges when retirees have to transfer their savings away from a pension provider that does not offer access to drawdown.
The idea of ‘default drawdown’ has also been floated by the government-backed pension scheme National Employment Savings Trust (Nest). It laid out a three-stage plan that would allow retirees to access cash, invest their money and receive a guaranteed income in later life.
The ‘blueprint for member decumulation’ would aim to stop pensioners from mis-managing their drawdown money and running out of cash in retirement.
Tom McPhail, head of pension research at Hargreaves Lansdown, said a ‘transparently competitive retirement market’ was needed to help consumers shop around for the best drawdown deal. However, he disagreed with a cost cap, saying that it would lead to savers becoming disengaged with their money.
‘Drawdown isn’t just about the price, it is also about putting investors in control of their money and giving them access to online tools and calculators to help them manage their money effective,’ he said.
‘The risk with price-capped ‘default drawdown’ is that investors won’t be sufficiently aware of the risks they face of investment losses or of drawing their money out too quickly. A default drawdown risks investors sleepwalking to unexpected investment losses.’
Instead he said the barriers to pension freedom should be removed ‘so that investors who have shopped around can move their money quickly and cheaply without having to pay unreasonable exit penalties’.”
Please click here to see the full article.