Why should I shop around for pension drawdown?
Income drawdown is becoming one of the most popular ways to generate an income from your retirement savings.
In a drawdown plan, you keep your savings invested in the markets to keep growing, while taking a flexible income as you go.
Much like any financial product, it's vital that you shop around for the best value drawdown products. Fail to do so, and you could end up paying more in fees and charges than is necessary.
In a 2018 investigation, Which? found that the difference between the cheapest and most expensive drawdown plans was a staggering £12,000 lost in charges over a 15 year period.
It is notoriously difficult to compare drawdown plans - but Which? has done the hard work for you, analysing the charges of dozens of drawdown providers and showing you how much drawdown might cost you during retirement.
How do pension drawdown charges work?
One of the major barriers to a straightforward comparison of costs is the fact that companies have very different charging structures.
You may incur five or six separate types of fee each year depending on the provider you choose. These could include:
- set-up fees
- annual administration charges
- platform charges
- dealing commission to trade funds and shares
You will also need to pay charges for the investments you select in your drawdown pension plan.
Some companies charge flat annual fees, while others charge a percentage fee based on the amount you have in your pension. Some combine the two types of fee.
It gets even more complex. Where percentage product or platform charges are levied in tiers according to value of your fund, there are two different approaches.
Some providers have an ‘income tax band’ system, where, say, the first £50,000 of your pot has a fee of 0.45%, with the next £150,000 incurring a charge of 0.4% and so on.
The alternative tiered structure works on a ‘whole fund’ basis, with a charge at one rate, which will vary depending on the plan’s overall value.
Pension drawdown plans compared
We've combed through the charges levied by 22 providers of pension drawdown - the most comprehensive analysis you can find.
In this table, you can find:
- Whether you need financial advice to access drawdown
- Any fixed fees you might face
- Relevant charges for pensions worth £100,000, £250,000 and £500,000.
These figures were correct as of January 2018.
Pension drawdown companies: in detail
Our company profiles outline the charging structures for the main providers and how they performed in our two cost scenarios.
The calculations in our scenarios were based on initial pension pots of £100,000 and £250,000 invested in three popular investment funds:
- Fidelity Moneybuilder Income (40%)
- Henderson Cautious Managed (40%)
- Schroder Income Maximiser (20%).
We also assume that 5% of the pot is withdrawn each year and your pension pot grows by 4% a year.
We've made some assumptions into our calculations – in relation to the timing and sequence of charge deductions, the growth applied to the funds, and so on. The same methodology was used for all providers to be fair and consistent.
The final fund totals will be slightly different in practice, but the like-for-like comparisons between the providers illustrate the potential impact of cost differences.