For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Drawdown fees: the price of pensions freedom
Few major policy shakeups are met without criticism in some corners, but it’s fair to say that the pension freedoms of 2015 have been viewed by retirees (and those approaching retirement) with a widespread, if cautious, embrace. Until then, it had effectively been mandatory for those of retirement age to annuitise their pension pots.
But while annuities bring the security of a guaranteed lifetime income, there have always been two main bugbears. Firstly, if the pensioner is unfortunate enough to pass away a short time after annuitising, the policy usually ceases, and it is the insurer who pockets what remains of their pot.
Yet the bigger issue has been that of plummeting rates, with annuity payouts stubbornly remaining at rock bottom of late. In fact, some annuities pay just over £5,000 per year on a pot of £100,000.
Clearly, the fact that these shackles have been broken since April 2015 is a force for good, and it comes as no surprise that more than 250,000 savers have opted for the new “drawdown” scheme, which allows them to withdraw from their pension pots (as they would from a cash machine) whilst still keeping the remaining funds invested.
Expensive fees leaving pensioners short?
After years of pension-related scandal, it appeared that hard-earned retirement savings were now finally bearing fruit for the individual, rather than the insurer or pension provider. Outrages such as annuities being sold to people in poor health in the mid-2000s, and the mis-selling of personal pensions in the decade prior to that, are still fresh in the mind, so this represented a welcome adjustment to the landscape.
But, as revealed in an investigation conducted by This is Money, this new utopia has been undermined by the extortionate withdrawal fees charged by insurers on drawdown plans – even to their most loyal customers. Indeed, comparisons between insurers showed a disparity of up to £13,654 on a £100,000 savings pot after 20 years of retirement in some cases (other things equal); purely as a result of fees levied on these respective plans.
Switching – or a lack thereof
It brings the grim prospect of hastening the point at which pensioners run out of money in old age, and has thus raised a flag with the Financial Conduct Authority (FCA). The regulator’s research showed that around 60 per cent of those using drawdown plans have been automatically enrolled into their existing provider’s drawdown deal, without scoping out a single alternative. The FCA also found that some 94 per cent of drawdown plans sold without the guidance of a financial adviser are taken up by pension firms’ existing customers.
Pensions are not the only sector dogged by high fees as a result of customer reluctance to switch, but it is one of the more complex in which to shop around. That may actually be a lenient description, as the market for pension choices can better resemble a minefield, where like-for-like comparisons are hard to come by, given the convoluted manner in which these are structured.
That’s where big-name providers have side-stepped the bounds of scrupulousness, luring customers with so-called ‘ready-made’ deals, which are promoted as a straightforward means to access nest eggs. The composition of the fund you wish to set up is decided merely by choosing the level of risk you wish to take on, thus making it an easy-to-understand process. However, the fees charged by insurers for the privilege are bordering on the extortionate, and, in some cases, existing providers are shifting pension pots into these more-expensive funds by default.
Keeping yourself protected
It’s thus little wonder that leading industry experts have called for Government intervention. After all, it was they who initiated the pension reforms, so it should be incumbent upon them to provide the appropriate level of protection for savers.
However, in the absence of any meaningful action, it is vital that individuals are vigilant, and bat for themselves in the interim. Shopping around for better deals is essential in this respect, and limiting the amount of savings lost to fees should be one of the primary objectives.
It’s important to note that low fees should not be the sole determinant of your choice of drawdown plan. Some providers are able to better protect your pension pot from stock market volatilities, and, in such cases, it is entirely reasonable for them to command a higher fee.
But the important point here is that the decision to pay a higher fee should be an educated one, not the result of inertia, or a lack of consideration for alternative options. Often it is more understanding than willing which is lacking, as many people who retire are not familiar with the intricacies of the pensions market.
It’s precisely why you should discuss your options with a financial adviser and/or industry expert. There may be an upfront cost associated with this, but it will likely keep you safe from exorbitant/unnecessary fees, and extract thousands of pounds more for you from your pension pot, thus ensuring you can sit back and enjoy the golden years you deserve.
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