The government plans to tackle the huge fees charged by some pension companies for accessing your pension savings, in a bid to make it easier to use the new pension freedoms.
Excessive fees and charges for using income drawdown – whereby you take a regular income from your pension savings while they are invested – were highlighted by a recent Which? investigation.
A consultation, launched today, explicitly seeks to address excessive fees charged for accessing your pension pot early – a move welcomed by Which? – and could include tackling income drawdown charges as well.
Barrier to pension freedom
Under the pension freedoms, introduced in April 2015, over-55s have more options for how they use their pension savings – they can withdraw the entire amount, put them into income drawdown, among other options. Previously, most people had little option but to buy an annuity.
The consultation, which will run for 12 weeks, will cover:
- excessive early exit penalties for taking your savings from the existing scheme
- the process for transferring pensions from one scheme to another
- the circumstances in which someone should seek financial advice
The government will publish a response in the autumn.
Which? research reveals high pension charges
The government’s consultation comes as a Which? investigation revealed some companies making high charges for customers using drawdown access- a key part of pension freedom.
We examined the fees charged by 18 providers, and found big differences, with some pension scheme members being charged thousands of pounds more than others over 10 years for accessing the same sums.
We 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.
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.’
Better Pensions campaign
Which? has launched a Better Pensions campaign 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
- safeguarding savings in schemes that go bust.
Pension charges: your questions answered
How can I avoid income drawdown charges?
If you don’t want to use income drawdown, you can still take ad-hoc amounts of money from your pension through so-called ‘uncrystallised fund pension lump sums’ (UFPLS) – which essentially means just taking lump sums out of your savings without transferring your pot into an income drawdown scheme (drawdown tends to be more flexible than UFPLS). But Which? research shows that UFPLS 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.
What pension charges has Which? investigated?
We’ve looked at UFPLS, and how much it would cost to set up and use income drawdown to withdraw money from your pension. Drawdown fees differ for the insurance companies and investment brokers we analysed. Six of them charge to set up a drawdown plan; seven charge an annual fee for using drawdown, and eight charge an annual fee is you have a self-invested personal pension (Sipp). Seven charge a simpler, single annual ‘platform fee’, but there can be management charges and extra fees for some types of investments.
What are the options for my pension pot?
In addition to taking out lump sums from your existing scheme, or transferring to a drawdown scheme, you could withdraw the entire fund in one go, but you may incur a hefty tax bill if you do that. Or you could use your pension pot to buy an annuity – in the traditional way. With an annuity, you swap your pension savings for a guaranteed income for the rest of your life. This might be a good option for some, but the aim of the pension freedoms is to open up the alternatives, following years of poor annuity rates.