Labour leader Ed Miliband has announced that the amount people can be charged to take money out of their pension pot via income drawdown would be capped under a Labour government. The news follows research by consumer body Which? that revealed notable differences in costs between drawdown providers.
Which? found that Aviva does not charge for starting income drawdown, but LV= charges a £295 'activation' flat fee for people with under £50,000 to invest. It also found that Standard Life's Active Money Sipp offers passive trackers with charges of 1 per cent or more a year, while rivals L&G, Aviva and LV= offer passive trackers for 0.1-0.3 per cent.
However, these insurer-run income drawdown offerings will not be the first choice of the DIY investor as they don't generally offer access to listed investments. Among the DIY investment platforms that offer more investment choice, there has already been lots of movement on drawdown charges, in anticipation of increased business once the new pension freedoms come into play on 6 April 2015.
Adrian Walker, retirement planning manager at Old Mutual Wealth, says: "Introducing a charge cap on drawdown facilities is unnecessary because market forces will impose an effective cap. Many providers, including ourselves, make no charge for drawdown itself, so this appears to be an unnecessary solution to a problem that does not even exist."
The Labour leader's proposal brings to mind previous charge caps on government-endorsed products such as stakeholder pensions and child trust funds, which allowed providers to charge way over the odds for products that should in effect have had much lower charges.
Much more useful for investors would be a standardised way of charging for income drawdown that allows better comparison of charges. Platform charges are still so complicated that it is difficult to work out which is the best for your particular situation. And the cost of drawdown itself is dwarfed by the ongoing costs of the underlying investments.
Jeremy Fawcett, head of direct investment at The Platforum, says: "Our most recent research shows that a fifth of investors plan to take retirement income as a DIY investor, so interest in the platform options is high. However, most are yet to announce what their price structures will be under the new freedoms. Hargreaves Lansdown and Alliance Trust Savings have announced new pricing, which gives us a comparison between the two very different types of charging, with Hargreaves Lansdown charging a percentage fee on assets held and Alliance Trust Savings levying a fixed annual fee."
Income drawdown fee changes
Here is a summary of the movement on drawdown charges so far:
■ Alliance Trust Savings is from 6 April scrapping all set-up charges on drawdown (which was previously up to £250). It will introduce an annual flat fee of £276 for all types of drawdown from January 2016. There will be no fee for being in drawdown from 6 April 2015 to January 2016. Previously, if a customer was in drawdown a charge for their general Sipp administration was charged separately from the annual drawdown charges, now these will be rolled together and charged once a year.
Patrick Mill, managing director at Alliance Trust Savings, says: "A flat fee can offer a client who has saved modestly for their retirement a significant saving against the percentage-based option."
He says the average Sipp value of ATS clients aged over 55, is over £220,000 but even at £75,000 the flat fee structure can "start reaping significant cost savings".
■ Tilney Bestinvest has announced new drawdown pricing for existing clients in income drawdown, as well as for new clients. For portfolios of £100,000 or more, it has dropped the annual £100 charge for income payments after tax-free cash.
■ Hargreaves Lansdown has scrapped its drawdown fees, so investors only pay its platform charge of 0.45 per cent a year - or less for Sipps worth over £250,000 invested in funds, plus the investment costs on top of this. No charges will be levied on investors who want to make an ad hoc withdrawal from their fund.
Many income drawdown providers have, however, yet to show their hand.
The table below, which was put together for Investors Chronicle by The Platforum, compares charges on several drawdown providers. Mr Fawcett says: "Please bear in mind that we're comparing some newly declared drawdown pricing models (such as Hargreaves Lansdown's) with several that haven't yet said what their new propositions will be. That means that we're assuming that capped drawdown price structures have gone and that the existing flexible drawdown charges will be used without fees for GAD calculations. Presumably some platforms will announce new price structures that won't be in line with those assumptions."
INCOME DRAWDOWN CHARGES FOR DIY INVESTORS
| Platform | Annual fees for £50,000 invested in a Sipp* | Annual fees for £350,000 invested in a Sipp* | Drawdown set-up costs | Ongoing drawdown costs | Exit fees / death benefit payments |
|---|---|---|---|---|---|
| AJ Bell Youinvest | £200 | £300 | £150 + VAT | £100+VAT a year drawdown fees (£50+VAT if no income taken), one off pension payments £25 +VAT | £250 + VAT death benefit, £150+VAT account closure fee, £75+VAT transfer out fee plus £25 per holding |
| Alliance Trust Savings | £186 | £186 | No charge | No charge (£276 per year from Jan 2016) | £150 + VAT transfer out, £200+VAT death benefit |
| Barclays Stockbrokers | £175 | £1,225 | £75 + VAT | Administration £100 + VAT per year (collected annually in advance) | £75 + VAT, payment of death benefit cost calculated on a time/cost basis |
| Tilney Bestinvest | £150 | £950 | Free (Flexi access drawdown fee of £150 + VAT). | £100 + VAT per year or £0 for portfolios of £100k or more. Ad hoc one-off income payments £25 + VAT | Account closure £75 + VAT, death benefits payment charged on a time/cost basis, exit as stock £125+VAT plus £25 + VAT per holding |
| Charles Stanley Direct | £245 | £995 | Free (£250 + VAT for flexible drawdown) | £50+VAT a year drawdown fees, one-off income payments £25 + VAT. | Transfer out £125+VAT + £10 per holding, death benefits payment charged on a time/cost basis |
| Fidelity | £175 | £700 | No charge | No charge | No charge |
| Hargreaves Lansdown | £225 | £1,375 | No charge | No charge | Death benefit payment £295 + VAT. Transfer to another provider as cash will be £25, transfers of stock will be £25 (per line of stock), account closure £25+VAT |
| Interactive Investor | £176 | £176 | £160+VAT (£260+VAT for flexible drawdown) | Income withdrawal £130 + VAT pa up to the age of 75, £210 + VAT a year after the age of 75 | £300 + VAT death benefits, transfer out £100+VAT |
| TD Direct Investing | £390 | £1,490 | Free (flexible drawdown £75+ VAT) | £150 + VAT a year drawdown fees (£250 + VAT a year if aged 75 and over) | Death benefits payment calculated on a time/cost basis (£350 + VAT average). Closing Sipp through flexible drawdown or trivial commutation £75 + VAT. |
| The Share Centre | £173 | £173 | £225 + VAT(flexible drawdown £225 + VAT) | Drawdown review £165 + VAT, pension income payment fee £195 + VAT | Death benefits from £300, based on £150 per hour fee, transfer out £100 + VAT plus £25 per holding |
| Trustnet Direct | £221 | £296 | £150+VAT (£250+VAT for flexible drawdown) | £125+VAT annual fee for income (£200+VAT after age 75) | Transfer out £100+VAT plus £15 per holding |
Source: The Platforum, 10 March 2015.
Note: *The platform fees do not include any trading costs or costs of drawdown (listed in separate columns), we also assume that only funds are held within the Sipp.
