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24 Mar 2018

Revealed: the true cost of pension drawdown

Exclusive Which? research reveals the high charges retirees face to access their own money

Some retirees see more than £12,000 sapped away in charges by managing their pension with the most expensive companies, exclusive new research from Which? reveals.

Pension drawdown - where your pension remains invested and you draw as much or as little money as you like - has increased in popularity dramatically since the pension freedoms of 2015.

Savers pulled £15.3bn from their pension via drawdown in 2016/17 - triple the amount from the previous year.

But Which? Money has found that retirees who use a drawdown plan with many of the traditional pension providers pay far higher charges than those who switch their pensions to an investment broker or fund supermarket.

In the worst case, our research suggests that a pension pot of £250,000 at retirement invested through Standard Life's drawdown offering would incur costs in excess of £38,000 over 15 years.

The same pot invested in the same funds with DIY broker Interactive Investor would end up costing £12,101 less.

The full investigation appears in the latest edition of Which? Money magazine. Take a two month trial for just £1 today to read the full report.

A whopping £12,000 in drawdown fees

We surveyed more than 20 providers of income drawdown to understand the different charges they levied to keep your money invested in retirement.

We then applied a scenario to this. If we had £250,000 in our pension, invested across three popular funds, and we:

  • withdrew 5% a year income, and;
  • our pension grew by 4% a year

how much would we have left after 15 years. And - crucially - how much would we have paid out in fees and charges?

The results were startling.Total charges over 15 years for the three most expensive companies in our investigation - Standard Life (£38,144), Aegon (£37,157) and Halifax Share Dealing (£36,081) - were between £10,000 and £12,000 more expensive than the most competitive operators in our analysis, primarily investment brokers.

Standard Life applies a high 'whole fund' admin charge of 0.55% for pots of between £100,000 and £249,999 (immediately applied after the first income withdrawal in our calculation), while Aegon charges between 0.45% and 0.60% on an 'income tax band' basis on funds less than £250,000, but 0% on funds above that.

Halifax Share Dealing combines hefty fixed fees with above-average fund charges. Pension firms generally proved more expensive in this scenario, taking five of the bottom six slots, but there were less pricey exceptions such as Old Mutual and Royal London.

You can see the full results in the table below.

CompanyName of productType of companyTotal cost over 15 yearsFund amount left after 15 years
Interactive InvestorSippFund supermarket£26,043£184,703
Close BrothersSippFund supermarket£26,468£184,011
Alliance Trust SavingsSippFund supermarket£26,620£183,996
The Share CentreSippFund supermarket£27,433£183,381
AJ Bell YouinvestSippFund supermarket£29,494£181,304
Charles Stanley DirectSippFund supermarket£30,046£180,771
BestinvestSippFund supermarket£30,153£180,647

Which? Money had to incorporate some assumptions into our calculations - the timing and sequence of charge deductions, the growth applied to the funds, and so on. We used the same method for all providers to be fair and consistent.

A raft of different charges

One of the major barriers to a straightforward comparison of pension drawdown costs is the fact that companies have wildly different charging structures.

You may incur five or six separate types of fee each year depending on the provider you opt for.

These could include drawdown set-up charges, annual administration charges, platform charges and fund fees, while there may be additional dealing commission for trading shares and, occasionally, funds too.

The consequence of higher charges is having significantly left to live on in later life.

Paying total fees of £38,000 would leave a diminished fund of £173,000, despite investment growth and factoring in sizeable annual withdrawals. The same pot with the lowest charges available would be worth nearly £185,000 at the end of the same term.

Inertia and opacity in drawdown

A report published by the Financial Conduct Authority (FCA) in July 2017, highlighted that people are taking the 'path of least resistance' and accepting drawdown from their longstanding pension providers without shopping around.

The lack of a way to effectively compare charges has undoubtedly contributed to inertia. Which? agrees with the FCA's assessment that it should be much easier for retirees to compare drawdown products - our research proved how difficult this is.

People should be able to make an informed decision, but currently it is extremely hard to compare different fees when they are presented inconsistently and with varying clarity.

Harry Rose, Which? Money editor, said: 'Rip-off drawdown charges will mean people end up paying thousands more than they need to over the course of their retirement.

'Providers should be more transparent about their fees so that people can find the best deal. The FCA must introduce a charge cap on default products to ensure that consumers don't miss out on the savings they need for retirement.