Making sense of new Sipp and drawdown charges

The advent of pension freedoms in 2015 swept away restrictions about how much you could take from your pension in income and platforms have had to respond to the new choices by altering their fee structures to fit. But the addition of new charges for the new retirement income options has made for a confusing list of fees, which include legacy fees for old customers as well as new deals and discounts, all stirred into the already-baffling array of annual Sipp fees.

Confused already? So were we. And so were some providers, who struggled to come forward with straightforward figures for income drawdown charges for the range of portfolio types and sizes that we presented to them.

What are the new options?

The new charges relate to new flexible income drawdown and taking lump sums from your pension. Flexible income drawdown allows you to take income from your pot without having to buy an annuity. Under the old pension rules, investors were only able to make use of it if their pot was a certain size, with others only able to take a more limited income from their pots, known as capped drawdown, or forced to buy an annuity.

Now all retirees will be able to take as much or as little as they want from their pots while leaving it invested if they convert their pots into flexible drawdown. When you convert your pot you take 25 per cent of it as a tax-free lump sum and then leave the rest invested in funds, stocks and shares while taking a regular income.

If you do not want to take a regular income and want to leave your cash invested you can also take lump sums, with 25 per cent of the cash tax free every time you do. This is known as taking an Uncrystallised Funds Pension Lump Sum, or the rather ugly sounding UFPLUS for short.

What are the most common charges for Sipps in income drawdown?

If you want to take an income under flexible drawdown, there are a range of charges heading your way. Those range from income drawdown set-up fees, annual charges and charges to add new funds to your portfolio. Those come before any annual administration charges or platform fees you pay on the funds.

Add to that the fact that those charges alter depending on whether you hold stocks, shares or funds and you might want to think carefully about which platform is right for you when choosing a Sipp with income drawdown in mind.

The cheapest platforms for income drawdown charges

The cheapest platforms are those that have either slashed fees for income drawdown or cut them entirely. Those include Tilney Bestinvest, which has scrapped all fees on accounts over £100,000 in income drawdown and no longer charges set-up fees to go into income drawdown. Bestinvest charges just a tiered percentage of your total holdings as an annual management fee for its Best Sipp.

Alliance Trust Savings (ATS) has also overhauled its offering and from 2016 will offer one of the most straightforward price structures by combining its income drawdown annual fee and Sipp annual administration fee into a single flat cost of £276 (£230 + VAT) for income accounts. It also abandoned its old £250 set-up fee for going into drawdown earlier this year when the starting gun was fired on pensions freedoms.

Others eschewing specific income drawdown fees include Hargreaves Lansdown, which recently scrapped income drawdown set-up fees, and Fidelity Personal Investing, which only offers fund dealing and charges a single tiered Sipp fee.

The best options for £1m Sipp pots

For a pot of £1m invested in funds, ATS, Interactive Investor and Halifax Sharedealing come out the lowest cost, charging between £276 (ATS), and £380 (Interactive Investor). For ATS that is due to its lack of charges for income drawdown, while Interactive Investor's low flat fees mean that it comes in at good value for those with lower pots when compared with those charging a fee as a percentage of your portfolio value.

For pots invested in stocks and shares, Hargeaves Lansdown comes out cheapest alongside AJ Bell Youinvest, despite being among the most expensive options for fund holders. A £1m fund pot held in a Hargreaves Sipp would cost £3,000 whereas a £1m pot of stocks would cost just £200 a year.

Hargreaves caps annual costs for those invested in stocks and shares but charges a tiered percentage fee for fund assets, making it appealing for large portfolio sizes held as stocks and shares but not as enticing for fund investors.

ATS and AJ Bell also come out cheap, with AJ Bell's £400 annual charge for a fund portfolio dropping down to just £200 for stocks and shares due to its 0.2 per cent a year fund custody charge (capped at a maximum £50 per quarter).

The most expensive options are TD Direct Invest, whose six-monthly account fee and platform fee (up to £1,500 a year) makes it a pricey way to invest larger pots. The platform also charges a fee to hold funds, meaning that for a £1m pot held in funds, it would cost £6,590 for a year and £2,715 for assets held in shares (assuming you traded 10 times during the year, incurring trading costs).

The best options for smaller pots

For pots of £100,000 invested in funds, the platforms charging fees as a percentage of assets come into their own. Fidelity and Tilney Bestinvest, neither of which charge separately to go into drawdown, emerge as two of the cheapest providers.

Fidelity, which charges a single annual fee of 0.35 per cent on assets between £7,500 and £250,000, would cost £350. Tilney Bestinvest costs £300 per year for a portfolio of funds and stocks and shares. Investors cannot hold stocks and shares as well as funds with Fidelity.

Among those cheapest for stocks and shares are Hargreaves, whose £200 annual fee cap on stocks and shares Sipps means investors have just £200 to pay, ATS and AJ Bell, which charges the same amount for all portfolio sizes because of its capped fees.

The most expensive options for the smallest pots are Charles Stanley Direct and TD Direct, both of which charge larger amounts in annual charges and income drawdown fees than many of their peers. The fees for a fund portfolio with Charles Stanley come in at £610 a year while TD Direct costs £890.

Dealing fees will change the picture

However, those charges look quite different depending on how often you trade. Some platforms will cut your annual costs if you trade more than a certain number of times in a year and some charge large commission fees for trading your investments, which might make them less appealing to you.

Charles Stanley Direct waives its platform charge if you trade stocks and shares more than six times in a six-month period. For smaller pots invested in stocks and shares, normally charged 0.25 per cent of assets held up to a £150 maximum that could make a big difference. For a portfolio of £300,000 that could take the annual cost from £660 a year to £410 a year.

Barclays Stockbrokers does not charge to sell funds but does charge to buy and sell stocks and shares. It is best for frequent traders as it charges £11.95 for up to nine deals a month and less for those trading more than 10 and 20 times a month.

Alliance Trust Savings, one of the cheapest options for smaller Sipps, charges a comparatively high fee of £12.50 to deal in stocks and shares and funds. If you traded 10 times in a year that would add £125 to your bill of £276. That means that Fidelity, £74 more expensive in terms of annual Sipp costs in income drawdown, comes out cheaper if you traded 10 times in a year. The platform does not allow you to invest in shares and funds in the same sipp but charges no dealing fees for funds.

However, Alliance Trust does offer discounts if you have used the platform for more than five years.

At the other end of the spectrum, AJ Bell Youinvest comes out slightly more expensive on an annual fee basis for £1m pots of funds but charges less for fund dealing - a flat fee of £4.95. Although 10 trades would not make it cheaper overall, if you traded more than this it could start to have an impact.

The platform is comparable for stock and share dealing, though, at £9.95 per deal for less than nine deals in the previous month.

What do you want to do with your Sipp?

If you want to convert your pot into income drawdown, the above examples will refer to you. But if you want to go down another route like taking uncrystallised lump sums or buying an annuity, those costs will look different again. Think carefully about what fees to seek out on the charge list before you jump.

What else could you be charged for?

As well as fees for going into drawdown, you will be charged for converting your account from an old-style capped drawdown Sipp to a flexible one. Converting from capped to flexi-access drawdown using a Halifax share dealing account would cost £90, for example. You will also be charged to add extra funds to your Sipp in income drawdown by most providers and to exit or pay death benefits.

Lowest annual charges for Sipps of £100,000

Lowest annual charges for Sipps of £300,000

Lowest annual charges for Sipps of £500,000

Lowest annual charges for Sipps of £1m

Most expensive options

*Assumes five buys and five sells a year

Dealing fee charges

Source: Investors Chronicle, as at 8 October 2015