Could rip-off pension fees take extra £10,000 from your retirement?

Pension savers who want to use their pension like a piggy bank and take advantage of new pension freedoms face a confusing and often eye-watering range of fees. Some providers will dig deep into your savings if you want the cash - so getting your hands on your money will cost you several thousands of pounds. And the difference between the cheapest and most expensive providers is shocking.

The findings come from Which? It looked at the fees that six providers and 12 investment brokers charged for income drawdown plans. It used the example of someone who wanted to withdraw regular lump sums from £250,000 in cash savings over the course of a decade - leaving the rest of the pension invested (assuming you take out 6% a year and the invested sum grows 5% a year).

The findings

The cheapest option it found was from LV=, which charged £16,325 over the ten year period. This was followed by Alliance Trust Savings, and AJ Bell Youinvest. The most expensive was Scottish Widows, which would charge £26,490 over the ten years. This was followed by Prudential and Aviva. It also ran the figures for smaller sums - and found different winner and losers.

It means that the difference between the cheapest and most expensive options in this example was an astonishing £10,000.

Some of the companies involved have responded to the Which? findings. Scottish Widows told the Daily Mail: "The Which? analysis is inaccurate and significantly misrepresents our charges." It added that it supported calls by Which? for a 1% total cap for existing customers and already applied this.

A spokesman for Prudential told the newspaper: "Comparing charges can be misleading if it's not done on a "like-for-like" basis. For example, fund charges for actively managed funds will cost more than for those of passively managed funds."

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Calls for cap
These concerns aside, the report also highlights just how easy it is to be confused by these products. It found some providers had set-up charges (charged by six providers in the study), others charged fees for each withdrawal (charged by seven providers). Then there were annual management fees - which will differ depending on where the invested portion of your pension is being held.
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According to Professional Adviser magazine, although seven providers in the study charged a single annual 'platform fee', there could be annual management charges on top, plus additional charges for certain types of investments.

Richard Lloyd, of Which?, said in a statement: "The baffling differences in costs and charges make it difficult to compare products, so more needs to be done to help over-55s make the most of their new-found freedom. We now want to see a cap on charges for drawdown products sold by someone's existing provider to ensure people get good value for money."

The risk

Tom McPhail, Head of Pensions Research at Hargreaves Lansdown - one of the brokers in the study - warns that there are risks involved in capping charges, because some providers charge for additional services that people find valuable - such as putting investors in control of their money and giving them access to online tools and calculators to help them manage their money effectively.

He explains: "The risk with a price-capped 'default drawdown' is that investors won't be sufficiently aware of the risks they face of investment losses or of drawing their money out too quickly. A 'default' drawdown risks investors sleepwalking into unexpected investment losses."

Instead, he argues in favour of: "A transparently competitive retirement market where informed investors shop around for the solutions which will suit them best." He added: "We would like to see the barriers to pension freedoms removed so that investors who have shopped around can move their money quickly and cheaply, without having to pay unreasonable exit penalties."

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