New calculations show somebody with a £100,000 pension pot could get £32,000 less retirement income from a high-charging plan, compared to the cheapest on the market. This could also increase the likelihood of depleting their pot and running out of money in their final years. Since pension freedoms were introduced in 2015, growing numbers have shunned annuities and invested their retirement savings through income drawdown, taking cash when they need it.
Drawdown offers greater flexibility and allows you to benefit from stock market growth and dividends but research from City watchdog the Financial Conduct Authority (FCA) shows charges can differ dramatically.
Some charge as little as 0.4 per cent a year but others can total as much as 1.6 per cent. That may sound a minor difference, but over a typical 20 or 25 year retirement it can really add up, according to calculations by online investment platform AJ Bell.
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If somebody with a £100,000 pot withdrew £5,000 income a year from age 65 and increased that in line with inflation, their money would last until age 92 with a 0.4 per cent charge. In total they would receive £176,722.
However at 1.6 per cent that income would run out by age 88 and they would have received £144,225 overall, or £32,497 less.
AJ Bell senior analyst Tom Selby said: “Shop around to get the best deal and review your retirement pot at least once a year.”
More than 20 companies offer drawdown including Aegon, AJ Bell, Aviva, Barnett Waddingham, Fidelity, Hargreaves Lansdown, Interactive Investor, LV=, PensionBee and Royal London.
Comparing charges is not easy as they may include set-up fees, annual administration charges, platform costs, dealing commission and underlying fund charges. A search on CompareDrawdown.co.uk suggests most providers charge more than 0.4 per cent a year. The cheapest plan it sourced, from Royal London, charged 0.85 per cent a year, with Standard Life next at 1.02 per cent. Hargreaves Lansdown charged 1.44 per cent.
Leaving your money in drawdown does allow you to benefit from stock market growth, but you will suffer if you make bad investment decisions or the market falls at the wrong time.
David Everett, partner at specialist pensions adviser LCP, said you must have some understanding of how markets work. Nobody knows how long they will live, so judging how much you can afford to draw is not easy. “It could lead to potential ruin for some,” Everett warned.
If your pension is large enough you could use half to buy an annuity that gives you a guaranteed income for life, then leave the rest in drawdown.
This is a complicated area and you should consider taking independent financial advice.