6th March 2015
Consumer group Which? has demanded that financial regulators set a price cap on income drawdown sold to customers by their existing pension provider.
The campaign group also wants the creation of a Government-backed, low-cost drawdown provider to offer an alternative to the private sector.
Which? has made the call with a month to go before the Government’s Freedom and Choice reforms come into force. These reforms are expected to lead many more people to stay invested and draw an income from their retirement pot rather than take out an annuity.
Which? says that its research shows there is still is a lack of product innovation and trust in the income drawdown market, with big variations in charges between companies and even within the same provider.
Which? says its research has uncovered several high charging drawdown products, including one that charges 2.76% annually. It says that this is too high for the mass market of investors. It particularly wants to see a cap introduced on products sold to customers by their existing provider where previously they might have taken out an annuity instead.
The group says that based on a scenario of someone with the typical pension pot of £36,000, drawing down £2,000 a year, it calculates that a cap of 0.5% would leave someone in our scenario around £10,300 better off than with charges at 2.75%. A 0.75% cap would mean that they have a total of around £8,800 more over their retirement and a 1% cap would give them around £7,500 more.
Which? says it also discovered one provider charging 0.5% more than another for investing in the exact same fund, and one provider’s charges ranging from 0.44% to 1.24% for very similar funds, which can make a significant difference over the course of someone’s retirement.
It also wants the Government to put in safeguards for drawdown providers which go bust.
Which? executive director, Richard Lloyd, said: “It’s right that the Government is giving people the freedom to decide how and when they access their hard-earned pension savings, but deciding how to use these savings in retirement is one of the most complex financial decisions many will have to make and one they cannot afford to get wrong.
“That’s why we want the Government to take action to secure better pensions so people have just as much protection when they take money out of their pension as when they put money in.”