Savers are being put off switching drawdown providers when they retire because of a dizzying array of charges and difficulties comparing costs, but those who do switch could save up to £12,300 over their retirement, according to new Which? Money research.
The consumer champion analysed hundreds of different fees across 28 providers to find what impact complex drawdown charges have on savers’ pension pots, and how much money would be saved by switching providers when it’s time to turn pension savings into retirement income.
Even on a £100,000 pension pot, people risk losing out to the tune of nearly £6,000 by not switching to a cheaper provider.
For those with larger pension pots, Which? found that investment brokers and wrap platforms generally proved cheaper than pension companies.
Which? estimated that £250,000 invested through the Aegon Retirement Choices product, the most expensive drawdown option for this fund size in its analysis, would cost more than £47,000 in charges over 20 years – £12,300 more than the cheapest option.
This means savers could be left with a much smaller fund at the end of the 20-year period: £154,000 with Aegon compared with £165,300 at Interactive Investor and Halifax Share Dealing, according to Which?’s research.
However, as Aegon doesn’t charge at all on funds above £250,000, it becomes more competitive for those with larger amounts.
The difference on a pension worth £500,000 at retirement is even starker. An Interactive Investor customer would have paid charges of £62,700 after two decades in retirement compared with £83,300 with Hargreaves Lansdown
Which? analysis found that intricate and confusing charging structures make it very difficult for savers to work out what they need to pay, or to compare costs between companies, and would leave many with no clear way to understand how they could make such savings.
When the consumer champion set about gathering information on charges for its analysis, not all of it was in the public domain – researchers had to scour website pages designed for advisers rather than consumers, and to approach pension companies directly to get the full detail it required for the comparisons.
It found that not only is there no consistency in the way that charges are displayed, but the charging structure itself can vary hugely from one provider to another.
Self-invested personal pensions (Sipps) via investment platforms will usually apply platform, fund and transaction charges. Advised products using wrap platforms can incur as many as seven or eight types of fee each year.
Opaque and unclear charges may explain why three fifths of drawdown customers stay with their existing provider when they need to start taking money from their retirement savings, despite being free to switch companies at any point.
Last year, Which? called for improved transparency on pension charges, including requiring pension providers to show consumers how much they have paid in fees each year and to annually report scheme costs and charges to regulators.
The consumer champion also called for stronger protections for consumers in retirement by introducing a cap on charges for non-advised consumers accessing drawdown products.
Much-needed changes are in the pipeline for drawdown providers that should make charges clearer – including the requirement for providers to show charges as a single pounds-and-pence figure on pension statements each year.
Jenny Ross, Which? Money Editor, said:
“The industry is still making it extremely difficult for savers to find and compare pension drawdown charges, which over time can make a startling difference to the size of your retirement pot.
“Some of the charges cannot be avoided, but other providers may offer the same investments at a lower cost, and savers are free to switch providers at any time.
“To prevent people from sleepwalking into excessive fees at retirement, the regulator should introduce a cap on pension drawdown charges and require providers to be more transparent about fees.”
Notes to editors
· Which? asked Hargreaves Lansdown and Aegon why their drawdown fees could prove expensive for certain pot sizes.
· Hargreaves Lansdown said: “Our fees are tiered and the average levied falls as clients’ pensions rise and meet various valuation milestones. Our pricing is very simple, transparent and great value for the services offered. Charging as a percentage encourages people to invest for the first time and build their pension pots.”
· Aegon said: “Our standard rate card is not representative of the charges the average customer pays. Terms are negotiated with advisers and customers with the vast majority paying significantly less.”
· Which? research on the heatmap shows what customers pay in core charges (fixed, platform and drawdown) over a year with 28 providers, on three different pot sizes.
· The consumer champion’s calculations assume that the money is entirely invested in funds (fund fees aren’t included, except where they are bundled), and that no trades are made. Which? also assumed that one withdrawal is made over the course of a year.
· Researching how charges add up over 20 years Which? looked at what the same 28 providers will cost, based on four initial pot sizes. The money is invested solely in funds with a typical fund cost of 0.7% applied. Investments grow at 4% per year and the drawdown customer annually withdraws 5% of the fund.
· Which? found that the difference in total charges is not the same as the difference in the final pots because of compound growth. It also revealed that pots which charge more will also generate less growth because any interest is being applied to a smaller pot.
· Which? is a non-profit organisation working to make life simpler, fairer and safer for consumers. During the coronavirus crisis, Which? is making a range of news, advice and guides available for free for anyone who needs it at: https://www.which.co.uk/news/coronavirus/