Retirees hit with massive drawdown fees

Retirees who choose to take a regular income from their pension savings could see as much as £13,500 gobbled up in rip-off fees, new research claims.

Love Money
Last updated:12 October 2017 - 01.19pm

Pension savers who regularly withdraw funds from their nest egg are being hit with massive fees by their providers, it has been claimed.

The problem occurs when savers access their pension savings and opt for a drawdown deal that allows for regular withdrawals.

At this point, 60% of us are simply switched to our current pension provider's drawdown deal and don’t bother to shop around to see if we could get a better deal elsewhere.

As a result, pension providers are moving people onto drawdown deals that make them a nice profit through the fund charges.

Read more: pensioners hit with huge bill for saving too much

Pension choices

Since 2015 pensioners have been faced with many options when it comes to funding their retirement.

You can use your pension pot to buy an annuity that provides a guaranteed income for life, keep your pension invested and just take an income from the investments, keep it invested and take occasional lump sums out, or you could do a mixture of the three.

If you choose to keep your pension invested and take an income or lump sum then you are putting your pension into ‘drawdown’.

When you do this your pension is moved into a range of funds and investments to provide you with continued capital growth and the ability to take an income or withdraw lump sums.

For many people this is the first time they have had to deal with investments and, fearful of what that entails, they choose to move to their pension provider’s ‘ready-made’ drawdown deal. But you may well be paying a premium if you do this.

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Rip-off fees

The investigation for Money Mail found that many big-name pension providers are charging rip-off fees on their drawdown deals.

For example, Prudential offers existing customers its Retirement Account if they want to go into drawdown but not pick their own investments.

This comes with a product fee of 0.65% a year, you then also pay a 0.65% annual fee if you choose funds from Prudential’s PruFund range.

These charges mean that someone with a £100,000 pension pot when they retire would have just £38,565 left after 20 years, according to research by Phil Dawson, director of AMS Retirement.

That assumes annual investment returns of 2.5% and a yearly £4,000 withdrawal.

Aviva offers a similar deal with savers charged 0.4% in management fees for the whole pension pot plus up to 0.8% fees for individual funds.

Using Dawson’s same assumptions someone investing £100,000 into Aviva’s Investors Distribution Fund would be left with £38,729 after 20 years.

In contrast, if pensioners shopped around and moved to a different provider when they go into drawdown they could save themselves thousands of pounds.

For example, if someone moved to AJ Bell when they retired and went into drawdown they would be charged around £100 a year in admin fees on a £100,000 pot plus a 0.25% annual charge. They could then choose from investment funds with annual fees of 0.22%.

After 20 years this person would have £47,361 left, on the same assumptions as Dawson made on the other calculations. That is a whopping £8,796 more than if they had stuck with Aviva or Prudential.

Royal London’s drawdown plan could save you even more money. With a fund fee of 0.1% and a discount of up to 0.65% depending on the size of your pot you could have £52,219 left after 20 years - £13,654 more than if you invested with Prudential.

Read more: Should you cash in your final salary pension?