One month before the Government’s pension reforms begin offering people more flexibility and choice, Which? is launching a campaign calling for ‘Better pensions’ as we find people could lose out on thousands if they are sold inappropriate retirement products.
The Government’s radical pension reforms mean that a month from today people will have more options than ever before on how to use their pension pot. This makes it likely that more people will use income drawdown products which allow them to take money out gradually each year. However, we found there still is a lack of product innovation and trust in this market, with big variations in charges between companies and even within the same provider.
In a snapshot investigation of drawdown products currently on the market, we looked at how the reforms might impact a consumer who uses their existing provider’s products, and found the costs vary significantly.
Our research uncovered several high charging drawdown products, including one that charges 2.76%. We think this is too high for the mass market and want to see a cap introduced on products sold to customers by their existing provider.
Based on a scenario of someone with the typical pension pot of £36,000, drawing down £2,000 a year, we calculate that a cap of 0.5% would leave someone in our scenario around £10,300 better off than with charges at 2.75%. A 0.75% cap would mean that they have a total of around £8,800 more over their retirement and a 1% cap would give them around £7,500 more.
We also found one provider charging 0.5% more than another for investing in the exact same fund, and one provider’s charges ranging from 0.44% to 1.24% for very similar funds, which can make a significant difference over the course of someone’s retirement.
The Which? ‘Better pensions’ campaign is calling for action to make sure everyone can benefit from the freedom and choices available to them. We want a Government-backed drawdown scheme to be established to give everyone access to a good value, low cost product no matter who their pension provider.
Which? executive director, Richard Lloyd, said:
“It’s right that the Government is giving people the freedom to decide how and when they access their hard-earned pension savings, but deciding how to use these savings in retirement is one of the most complex financial decisions many will have to make and one they cannot afford to get wrong.
“That’s why we want the Government to take action to secure better pensions so people have just as much protection when they take money out of their pension as when they put money in.”
We know that people are worried about how much money they will need in retirement. The latest research from the Which? Consumer Insight Tracker reveals two-thirds (66%) of those aged 50-64 are worried about the value of their pension and just one in five (19%) people trust the providers of long-term financial products, such as pensions, to act in their best interests. We also found only four in ten (41%) retired people say they are living comfortably on their pension.
We want 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.
People can sign up to campaign at: which.co.uk/betterpensions
Notes to editors:
1. Our ‘Better pensions’ campaign is calling for Government, pension providers and regulators to:
Establish a low-cost, high value scheme, open to all consumers
Create a Government-backed “backstop provider”: In the same way as it created NEST to enable all consumers to save, the Government should lay foundations for a low-cost, high value Government-backed scheme for consumers to use in retirement. Once appointed, that provider should develop products that match consumers’ needs (e.g. by managing risk and volatility, offering low charges, and offering some flexibility so that members can adjust to changes in personal circumstances).
Default disengaged consumers into that provider: Should consumers not engage with their retirement decision, or should the market fail to provide real choice and good value, the Government should assess whether it could default consumers who don’t make an active choice to this provider.
Cap charges so people can take money out gradually without having their savings eroded by fees
Introduce a charge cap: The Government should work with the FCA to introduce a charge cap for drawdown products sold by a customer’s existing provider where the consumer does not exercise an active choice.
Safeguard savings in schemes that go bust
Extend the Financial Services Compensation Scheme’s (FSCS) coverage of drawdown products: To avoid damage to consumer confidence in the event of a product provider going out of business, the Government should work with the FSCS to ensure greater protection is afforded to users of drawdown products as soon as possible.
Increase awareness and prevention of scams and sales of unregulated investment schemes: During 2015, the Government should focus its scams awareness outreach work on pension scams. The FCA should also step up its monitoring and enforcement activity against scams and the distribution of Unregulated Collective Investment Schemes (UCIS) and take action with industry to support consumer awareness.
2. Which? has free information and advice at which.co.uk/pensions-
3. Methodology on charge cap difference: To calculate the impact of a charge cap, we assumed someone invested in 50% equities and 50% fixed interest assets, with a £36,000 pot, draws down £2,000 a year in real terms, with a platform fee of 0.3%. The remaining charge deduction is taken off annual investment returns. We assume 2% returns on bonds, 5% returns on equities (in line with research by the FSA and PricewaterhouseCoopers in April 2012).
Difference in drawdown compared to a lower cap:
A consumer with a pension pot of £36,000 (the average Defined Contribution pot based on ABI figures on the average pot used to buy an annuity in Q3 in 2014) has decided they want an income drawdown product but do not wish to choose their own investment strategy or funds.4. Methodology on existing drawdown products: To provide a snapshot of the market before the reforms take effect, Which? researched the costs of a sample of drawdown products currently available. To be able to make a realistic comparison, we created a scenario based on the following assumptions:
- They enter into income drawdown with their current pension provider. We assume that this consumer uses a simple drawdown platform. Their pot is invested using a reasonable asset allocation (roughly 50% equities, 40% bonds and 10% cash).
- We also looked at some funds available outside this specified asset allocation to gauge how much charges may vary more broadly within income drawdown products.
- In our scenario, the gap between charges of 0.44% and 1.24% for similar funds would make a difference of around £4,400 over the course of someone’s retirement.
5. Methodology for Which? Consumer Insight Tracker: Populus, on behalf of Which?, interviewed a representative sample of 2,088 UK adults online between 16th – 18th January 2015 and 2,251 UK adults online between 17th – 18th September 2014. Data were weighted to be demographically representative of all UK adults.