6th March 2015 by John Lappin
One gets a sense from the Labour opposition that if they are in doubt about an area of the market, they propose a price cap. They are proposing to do this for income drawdown.
An announcement from the Labour leader Ed Miliband some time today but ‘prebriefed’ to the Financial Times neatly dovetails with a call for a similar move from consumer group Which? One would almost think they were coordinating things!
Which? says its research shows that charges can be unacceptably high in income drawdown, though we must also note that many providers have recently cut charges some by significant amounts and one of them, at least, says that Which?’s figures are out of date.
Which? is most concerned that people will see charges erode their income drawdown portfolio at an accelerated rate and that they run out of money. Clearly Labour is of a similar view. Which? has run the figures at a rate of withdrawal of 5.55% from a portfolio, though the industry consensus is that a level of 4% is around the maximum you can take without running down a portfolio significantly. And that is only in very general terms, of course, not taking a market crash into account for example.
Which? worries that people will simply let their investments fall into a drawdown arrangement by default, by leaving their money with their existing provider and being overcharged for the privilege.
At Mindful Money, we are not sure how big a risk this is. First many pension providers and very many workplace pension arrangements will simply not provide income drawdown as we understand it. Some of those pension firms that will offer drawdown, will not countenance providing this service without customers seeking advice and it may be difficult to find advisers who will recommend drawdown for such small pots. Surely those consumers who actively make a decision to do it themselves will take a look at the charges too.
So in a lot of scenarios, customers will have to consider going elsewhere which does force them think a little more.
But much relies on this consumer awareness and for the wider population, when it comes to pensions, awareness has been in short supply. Far too many consumers have defaulted into a poor value annuities historically, hence Which?’s concerns that this poor annuity outcome will be replaced with another poor drawdown outcome.
But does this need Government action in the form of a cap? Our view at MM is first that we have no idea what is going to happen from April. Huge amounts of pension assets may be taken at a quite punishing rate of tax and pushed into the buy-to-let property market for good or ill.
Some people may be scammed by taking their money and placing it into dodgy investment schemes with little recourse to redress. That is before we get to those who may be duped into pension liberation earlier than the 55 age limit, potentially the biggest disaster of the lot.
In addition, it is clear that many people will fail to get effective help partly because plans for pension guidance – now called Pension Wise have been rushed, while no-one has had the wit to come up with a form of advice that doesn’t require the full and expensive kind of fact find, know your customer and compensation rules. That is the type of advice that might say ‘you really don’t have enough money or the right appetite for risk to be in drawdown anyway, regardless of what it costs’.
The risks, or so it seems to Mindful Money, is doing the wrong thing and not being able to reverse that decision.
This is all rather messy and there are no obvious simple solutions. There is a huge amount that could go wrong but a price cap feels – for now – a very easy option.
For Labour, it garners headlines. It looks as if they are doing something. It appeals to their instincts. It doesn’t cost them any money in these straitened economic times.
It does help them sound as if they are giving something back to retirees having announced big cuts to pension tax reliefs, albeit ones that will mostly affect the better off.
But we suspect something else. We don’t believe Labour likes these reforms at all. It would still require pensioners to provide a minimum income for themselves if it could. But given how popular Freedom and Choice appears to be and how unpopular annuities are, it probably won’t dare.
That isn’t to say that really high charged income drawdown is a good thing. It certainly is not and risks running down a portfolio faster than it should. It might even make sense to have a vanilla version of drawdown perhaps offered by the current state-backed workplace pension provider Nest, though that organisation has its hands full extending workplace savings to smaller employers at the moment. Such a provider would keep the rest of the market ‘honest’ though any mechanism for moving money automatically could face a host of challenges and pitfalls.
So in summary, it may make sense for Labour to threaten a charge cap but we don’t agree with proposing one now. We think a huge number of things could go wrong but drawdown overcharging wouldn’t be on the top of the urgent pile. To our mind, a government-in-waiting would make it clear it would monitor the situation and be prepared to act in any number of ways, but not before it sees what happens.
* If you are Mindful Money reader, we can only suggest that you pay close attention to what you plan to do with your retirement cash and inform yourself as well as possible. That could include seeking advice. And check and challenge all charges. But we expect you do that already.