When you approach retirement you may well want to convert your pension pot from an accumulation into an income-paying portfolio. A straightforward way to do this is to swap your fund accumulation units for income units, and some platforms facilitate this trade seamlessly. But a number of platforms could burden you with charges if you make this swap.
According to independent financial adviser Candid Financial Advice, around three-quarters of platforms, including Hargreaves Lansdown and Alliance Trust Savings, are forcing investors to sell out of growth units and buy back income units when they want to take income from their portfolios. This means that investors have to leave the market and maybe also pay dealing fees.
Of the 19 platforms surveyed, only five facilitated accumulation to income unit conversion. AJ Bell, Bestinvest, Charles Stanley Direct, Cofunds and Transact enable customers to move seamlessly from growth to income units without leaving the market or selling units. Because platforms liaise with fund managers, you end up with an identical amount invested after conversion.
However many platforms force investors to first sell their accumulation fund units and then buy income units, potentially landing them with a significant capital loss if the market rises while they are in-between buying and selling. Candid Money says that anyone with a £200,000 individual savings account (Isa) portfolio moving between accumulation and income units would lose £2,000 if they were forced to sell and buy back over a period when the markets moved 1 per cent.
That cost could be even higher when movements in fund trading spreads - the gap between the buying and selling price - and any dilution levy are added on. Several platforms also charge dealing fees for fund trades, which would further add to the cost of switching between growth and income units.
Platforms such as Hargreaves Lansdown do not charge investors to trade funds. But others, including Alliance Trust Savings, do - which could cause a hefty transaction bill if you intend to make the switch across a large number of funds. In the case of Alliance Trust Savings, a single fund trade costs £12.50, although the platform offers a loyalty discount if you trade more frequently.
"It is quite common for investors to use fund accumulation units pre-retirement and then move to income units when they need to start receiving income," says Justin Modray, director at Candid Financial Advice. "You'd think converting one to the other would be a standard service offered by all investment platforms, but our research suggests around three-quarters don't. This effectively forces their customers to incur market risk and charges from having to sell and buy back units, which could potentially cost them thousands of pounds.
"It's both frustrating and unreasonable that most platforms require investors to take this gamble. The conversion itself is handled by fund managers, so platforms have no excuse. This inertia could leave some of their customers paying a potentially hefty price when they require income."
Platform policy on switching fund units
| Platforms that offer Acc to Inc conversion | Platforms that require investors to sell Acc units then repurchase Inc | Charge to deal funds?* |
|---|---|---|
| AJ Bell Youinvest | Alliance Trust Savings | Yes, £12.50 per online trade (loyalty discounts apply) |
| Bestinvest | Ascentric | Yes, £9.50 per online trade |
| Charles Stanley Direct | AXA Self Investor | No |
| Cofunds | Fidelity (except for Fidelity funds) | No |
| Transact | Halifax Sharedealing | Yes, £12.50 per online trade |
| Hargreaves Lansdown | No | |
| Interactive Investor | Yes, £10 per online trade | |
| iWeb | Yes, £5 per trade | |
| James Hay | No | |
| Novia | No? | |
| Nucleus | No | |
| Old Mutual Wealth | No? | |
| Standard Life Wrap | Only for listed securities, £10 per transactions less than £25k | |
| Trustnet Direct | Yes, £10 per online trade |
Source: Candid Money and *Investors Chronicle from company websites
