While the sweeping changes coming in from April will make pensions considerably more flexible for retirees, they will also expose them to products with charges many times higher than they enjoyed when they were building up their pots.
The charity Age UK is so concerned about the problem it is calling on the government to make providers of retirement products clean up their act. Age UK believes companies offering retirement products should operate under similar charge controls and quality standards to those that govern auto enrolment pensions.
Without these controls, Age UK fears hundreds of thousands of pensioners could miss out on up to a third of their pot as a result of high charges. The charity fears these products could result in pensioners’ pots being eaten up just a few years into their retirement, leaving them with nothing but state pension and benefits to live off.
We support wholeheartedly Age UK’s call for a fair deal for retiring workers – it seems foolish to have charge caps and quality controls all the way to retirement only to allow providers free rein to exploit vulnerable pensioners once they stop working.
The concerns have arisen because of new rules coming in from April that will allow anyone over 55, whether or not they are still working and contributing into a pension, the right to take all or any of their pension as cash. The obligation to buy an annuity is being removed altogether – with retirees entitled to draw their cash in tranches or one big lump sum if they want, a quarter of it tax-free and the rest taxed at their marginal rate.
Experts predict that a large proportion of people who would have bought annuities under the old rules will now choose to remain invested in the stockmarket through a structure known as flexible access drawdown, commonly known as income drawdown.
With income drawdown, the retiree’s pot is invested in the stockmarket, and a percentage is drawn each year, hopefully from the returns generated by the portfolio, although investors often take a slice of their original capital investment each year as well.
The problem is, not only are the charges on income drawdown plans beyond the scope of the government’s charge cap for auto-enrolment schemes, but they also come in many shapes and sizes.
Income drawdown investors can pay up to five different sorts of charges, ranging from set-up and ongoing administration costs, investment management costs, platform charges, fees for switching between different types of investments and advice costs.
Age UK has published figures that show just how corrosive high drawdown charges can be, even on a relatively modest drawdown pot. It calculates someone with a £29,000 pot withdrawing £2,000 a year will receive £11,000 less income over their retirement if they choose a high-cost drawdown plan with an initial 2% charge, 2% a year annual management fees and £150 in annual administration charges than if they opt for a similar product with a single low charge of 0.75%.
The higher charging product will also mean they will run out of money almost six years earlier than if they had invested through the cheaper option. This should not be allowed to happen to savings people have built up over their lives, just because they choose the wrong product.
NOW: Pensions has for several years now been at the forefront of the campaign for low charges for pension savers. Our 0.3% annual charge, plus £18 a year admin fee is arguably the lowest cost deal around for long-term pension savers. That’s why we fully support Age UK’s call for cost and quality controls around retirement products.