Labour warns on rip-off pension income charges

24 November 2014

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.

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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."

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