Revealed: The true cost of pension freedom

Which? calls on the Government to go further to help everyone benefit from the pension reforms, as we reveal there are big differences in what providers charge.

Nearly four months on from the pension reforms, we’ve looked at income drawdown products from 18 companies to find out exactly what it costs to take out your money as you wish. We’ve calculated that someone with a pension pot of £50,000, taking 4% a year through income drawdown, could be over £3,000 better off over 10 years if they used the cheapest provider, Fidelity (£4,993), rather than the most expensive, The Share Centre (£8,100).

Someone with a larger pot of £250,000, who withdraws 6% a year, could face charges anywhere between £16,325 (LV), and £26,490 (Scottish Widows) over a decade – a difference of more than £10,000.

Some pension providers aren’t offering drawdown at all, which means that in coming years millions of people may be forced to transfer to a new company to get flexible access to their cash. However we found it can be difficult to compare and find the cheapest provider as there are wide variations in how they charge, with some people facing as many as five separate types of fees.

Of the 18 companies who responded to our survey, six 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. Seven charge a simpler, single annual ‘platform fee’ but even on top of this there can be annual management charges and additional fees for certain types of investments.

Those who don’t want to use income drawdown can still take ad-hoc amounts of money from their pension through Uncrystallised Fund Pension Lump Sums (UFPLS), but our research shows this can also lead to hefty charges, particularly with investment brokers. Charles Stanley Direct charges £270 for the first withdrawal each year, James Hay charges £100, and Barclays Stockbrokers, Halifax Sharedealing and TD Direct all charge £90. This is compared to Fidelity and Hargreaves Lansdown, and some pension companies, which don’t charge anything at all.

The Government is looking at making it easier for people to move pension companies, including considering a cap on exit penalties, but we think they could go further to ensure everyone can access their money flexibly without facing excessive fees.

We want the Financial Conduct Authority to work with the industry to simplify charges so it’s easier to compare and for the Government to introduce a charge cap for default drawdown products sold by someone’s existing provider.

Which? executive director, 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 freedoms.

“We’re campaigning for a cap on charges for drawdown products sold by someone’s existing provider to ensure people get good value for money.”

Our Better Pensions campaign is calling for the Government, pension providers and regulators to protect people when they take money out of their pension by:

  • Establishing a Government-backed provider to ensure everyone can access a good value, low cost product;
  • Introducing a charge cap for default drawdown products; and
  • Safeguarding savings in schemes that go bust.

Notes to editors:

To see a copy of the full article please email lloyd.purnell@which.co.uk

  1.  Methodology: We surveyed 18 companies offering full pension freedom – eight insurance companies and 12 investment brokers – to find out how much it would cost to set up and use drawdown and UFPLS to take money out of your pension.
  2. We used two different scenarios for our research. The scenarios covered initial pension pot sizes of £50,000 and £250,000 converting to income drawdown, invested in the Henderson Cautious Managed fund. We assumed subsequent investment growth of 5% a year. Money was drawn down at the rate of 4% per year (£2,000 in the first year) on the smaller fund and 6% on the larger pot (£15,000 in the first year). Charges were then deducted to highlight the annual cost of charges and the impact on the fund over a longer period. We used the Henderson Cautious Managed fund in our scenarios as it is a popular multi-asset fund with around £2 billion under administration. It also has an appropriate balance of assets (roughly 33% bonds, 15% cash and 50% equities) for a medium-risk investor.
  3. Although LV was the cheapest in our scenario for drawdown charges, as an advised business LV requires you to seek financial advice before you go into drawdown and you’ll have to factor in these costs.
  4. ‘Uncrystallised funds pension lump sums’ (UFPLS): This means that you haven’t ‘crystallised’ your pension pot, by turning it into an income. It’s similar to using your pension like a savings account, taking cash out when you need, with the rest continuing to grow.

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