Beware the £10k difference in income drawdown costs
People taking income drawdown from their pension funds could be paying up to £10,000 more than they need to if they don't shop around for the best deal.
A retirement saver with a large pot of £250,000 who withdraws 6% a year could face charges over a decade of anywhere between £16,325 with LV= and £26,490 with Scottish Widows, according to research by Which?.
Someone with a pension of £50,000, taking 4% a year, could pay around £3,000 more than necessary over 10 years if they failed to use the cheapest drawdown provider. Which? found Fidelity to be the cheapest with charges of £4,993 and The Share Centre to be the most expensive at £8,100.
Which? researched 18 retirement companies offering income drawdown and reported difficulties in comparing their costs and finding the cheapest provider as "there are wide variations in how they charge". It added that some customers face having to pay up to five separate types of fees.
According to a poll of all 18 companies, six charged drawdown set-up fees, seven an annual drawdown fee and eight an annual fee if customers have a self-invested personal pension.
Another seven charged "a simpler, single annual 'platform fee'", but Which? warned "even on top of this there can be annual management charges and additional fees for certain types of investments".
The consumer group also reported that nearly four months on from the pension reforms some pension providers aren't offering income drawdown at all. That means their customers face having to transfer their pensions to a new company to access some of their money, while leaving the rest invested.
It explained: "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."
It found that Charles Stanley Direct charges £270 for the first withdrawal each year, James Hay £100, and Barclays Stockbrokers, Halifax Sharedealing and TD Direct all £90. However, Fidelity and Hargreaves Lansdown, among others, don't charge anything.
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."
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "The only sustainable answer is that we have a transparently competitive retirement market where informed investors shop around for the solutions which will suit them best.
"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 effectively. The risk with a 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 into unexpected investment losses."
He is calling for the barriers to pension freedoms to be removed "so that investors who have shopped around can move their money quickly and cheaply, with having to pay unreasonable exit penalties".
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.