Drawing your pension: Why it is important to obtain the right advice.

People who take their pension pots as cash during retirement face losing more than £25,000 in rip-off fees, analysis for The Sunday Times Money section has found.

At the end of June 2018, the Financial Conduct Authority (FCA) published a damning report after a two-year investigation into how retirees are treated when they take money flexibly out of their pensions — a process known as “drawdown”. It found that a quarter of customers have no idea what fees they are paying, and warned that charges were “complex, opaque and hard to compare”. In some cases, products had as many as 44 different fees linked to them.

The consultancy Hymans Robertson found some savers are paying as much as 2.5% in annual fees. For a £100,000 pension pot cashed in during a 20-year retirement, the customer would fork out £30,036 in fees. Other savers can pay as little as 0.4% — for a total over two decades of a much more modest £4,805.

More than 1.5m savers have used drawdown since pension freedom rules, introduced in April 2015, allowed them to draw money from their pots flexibly from the age of 55. Previously, most people had to buy an annuity — an insurance product that provides a guaranteed income for life.

The Sunday Times asked a number of pension companies for their drawdown fees and found a confusing array of charging structures. There is typically a pension wrapper fee, which depends on the size of the pot, plus a fee for the underlying investment. Aviva said it charges up to 0.4% a year for its wrapper, while fund fees range from 0.1% to 1.5%. So a customer choosing a more expensive investment fund could pay 1.9% in total.

Prudential charges 0.25%- 0.65% a year, according to pension size, and its most popular investment fund has an annual fee of 0.65%.

Standard Life has a combined wrapper and investment fee; its total charge ranges from 0.71% to 1.37% a year. Scottish Widows charges between 0.1% and 0.9% a year, with investment fund costs of 0.1% on top.

Meanwhile, Zurich levies a 0.35% fee for pension pots worth up to £100,000, plus a £75 annual fee. Bewilderingly, it said that, according to the information provided by investment funds, underlying fund fees ranged from -1.19% to 10.28% a year. It stressed that these external costs were outside its control.

The FCA plans to introduce new rules requiring providers to show customers a total annual charge in pounds and pence, rather than a mixture of percentage fees and charges in pounds. It also said it could bring in a price cap if it found that “firms are charging excessively”.

However, Frank Field, chairman of the work and pensions committee, accused the regulator of “devilishly glacial progress” and called for the charge cap to be introduced immediately, rather than wait another year “while life savings are shamelessly milked”.

An online drawdown comparison tool hosted by the government-backed Money Advice Service is expected to go live next year, which should help savers find the best product for them.

Of the thousands of pension customers who cash in their pots at retirement without taking financial advice, just 6% switch to a different provider for drawdown, the FCA found. The rest stick with the pension firm they used to build up their nest-egg.

This compares with 30% of savers who move to another provider to buy an annuity.

There has previously been a big drive to encourage customers to shop around for an annuity to avoid being stuck with a poor deal, but little has been done in the drawdown market, even though it is now twice as popular as buying an annuity.

The FCA also expressed concern that some pension firms were placing customers in cash or cash-like assets at retirement, which would be unsuitable for many people. It said customers withdrawing their money over 20 years could raise their annual income by 37% by investing instead in assets such as shares and bonds.

Worryingly, the FCA found that 60% of savers were unsure what their pension pots were invested in.

The above highlights the importance of getting fully independent advice and using a cash flow model to demonstrate the effects of charges/growth over time.

As this is a specialist area of advice it is important to seek out this information from an appropriate financial adviser. Richmond House Group has this specialist knowledge and are always available to answer your questions.

John Merrifield.

Dip PFS, Cert (CII) MP.

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. The value of investments can fall as well as rise and you may not get back the full value of your investment