Labour warns on rip-off pension income charges
Labour has issued a warning over "rip-off" pension charges that could be levied on new-style products when pensions reforms are introduced in April 2015.
Around 320,000 people are expected to take advantage of the new rules which will, from the age of 55, allow pension savers to access part of their pension while keeping the rest invested in the stock market - known as income drawdown.
But shadow pensions minister Gregg McClymont is concerned that the government "has not thought through the risks of rip-off charges being taken from the savings of hardworking people," and wants to introduce a price cap on drawdown charges.
The government is introducing cap of 0.75% on workplace pensions schemes in April 2015, but the new cap does not include income drawdown schemes.
Labour says it has been concerned about charges for some time. In May 2014 it launched a review of retirement income led by David Blake at the Cass Business School, which will study how savers in defined contribution schemes can boost their income in retirement.
As part of this, Blake confirmed on 24 November that he will be looking at whether income drawdown products should be subject to a new charge cap.
New charge cap
McClymont said: "I welcome the announcement by David Blake's Independent Review of Retirement Income that they are studying the case for a new charge cap on pension products offered to savers by their pension provider to replace annuities.
"Labour is on the side of people who work hard, save and do the right thing and we will act to ensure savers are protected from rip-off fees and charges."
However, Tom McPhail, head of pensions research at Hargreaves Lansdown, argues that low-cost drawdown is already available and says investors should "take responsibility for their own money".
He said: "We offer a drawdown plan today that only charges only a one-off fee of £90 including VAT – far below any possible price cap – however we do not believe a price cap is the right answer. A knee-jerk response of 'if we can't understand it, then price-cap it' is an extremely dangerous mind-set to adopt.
"Drawdown comes in a multitude of flavours, so trying to come up with an effective price cap mechanism would be virtually impossible."
He added: "The answer lies in encouraging investors to take responsibility for their own money and for a well-regulated industry to help them to select the most suitable solutions for their needs. Even with a price cap on drawdown, the market still needs to help investors shop around for the best value annuities.
"The greater risk to investors lies not in product solutions from the well-regulated and responsible pensions and advisory sector; it comes from the unregulated advisers and investment schemes who will seek to inveigle unsuspecting investors into spurious schemes which will offer no redress in the event that they fail to live up to their promises. It is this market, rather than the responsible, regulated businesses which the politicians should have in their sights."
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.