Thousands of income drawdown investors are paying excessive charges on their pension income, according to an investigation by Hargreaves Lansdown.
When income drawdown plans were first designed back in the mid-1990s, they were a high-end pensions product, aimed at very wealthy pension investors. As a niche product, it was quite common for investors to be charged set up and annual fees of hundreds of pounds.
Nigel Callaghan, a pensions analyst at Hargreaves Lansdown, says: "Investors need to check that their drawdown plans still represent value for money. Technological advances and fierce competition have resulted in drawdown evolving from an expensive niche product for the very wealthy few, to a viable everyday option for the many investors who are happy with the risks involved."
Income drawdown is a facility that allows an individual aged between 50 and 75 to defer the purchase of their pension from an insurance company. An income is drawn from the pension fund, and the residual fund remains invested. The maximum income that may be drawn is 120 per cent of the pension that could have been purchased calculated using Government Actuary rates. There is no minimum.
Since 2000, 175,000 income drawdown plans have been set up with £19bn being invested. In 2008, 29,000 income drawdown plans were bought, accounting for 20 per cent of all retirement funds invested.
The average-sized income drawdown fund in 2008 was £80,000. Hargreaves Lansdown calculates that by reducing the charges by just 1 per cent per year, this fund could be worth £26,500 more in 15 years.
Ask your income drawdown provider or your independent financial adviser to list the charges being levied on your drawdown plan. Armed with this information, you can shop around among providers to establish how much money you can save by moving to another provider.
Many investors will be able to keep the same investments and income levels. However, it may not be as easy to move income drawdown providers if you have complicated or highly esoteric investments.
COST OF INCOME DRAWDOWN PLANS
| Company | Sipp set up fee | Drawdown fee | Annual management charge | Annual fee for income withdrawal | Total amount deducted after 10 years |
| Scottish Widows | £463 | £0 | £533 | £154 | £7,333 |
| James Hay Private Client | £290 | £0 | £455 | £150 | £6,340 |
| Prudential | £300 | £0 | £425 | £0 | £4,550 |
| Standard Life | up to £302 | £0 | up to £260 | £125 | up to £4,152 |
| Killik & Co | £0 | £200 | £150 | up to £180 | up to £3,500 |
| Halifax | £0 | £0 | £150 | £150 | £3,000 |
| Aegon Scottish Equitable | £0 | £0 | £270 | £0 | £2,700 |
| James Hay E Sipp | £0 | £0 | £150 | £0 | £1,500 |
| Sippdeal | £0 | £150 | £0 | up to £120 | up to £1,350 |
| Hargreaves Lansdown | £0 | £75 | £0 | £0 | £75 |
Source: Hargreaves Lansdown
