Pension freedom comes at a cost and some savers are paying a lot more than others as financial firms are making big profits to allow early access to retirement cash.
A study comparing charges savers are paying on income drawdown services from 18 leading pension providers revealed someone could end up £3,000 better off over 10 years if they opted for the firm with the lowest charges.
The comparison was based on taking an income of 4% as drawdown every year on a pension of £50,000.
The cheapest provider was Fidelity, charging £4,993 over the 10 year drawdown, while the most expensive was £8,100 billed by The Share Centre, according to the study by consumer magazine Which? Money.
The comparison also looked at costs for 6% a year income drawdown on pension funds of £250,000.
Five different charges
The figures were also based on a 10-year period and disclosed a £10,000 differential between the cheapest – LV charging £16,325 – and the most expensive – Scottish Widows charging £26,490.
Although many larger pension providers offer flexible access, Which? also points out the smaller providers do not and retirement savers who want to take advantage of the new rules face paying exit charges if they switch providers offering the service.
The magazine also accuses pension providers of offering confusing pricing structures which make income drawdown comparisons difficult for ordinary consumers to work out.
Out of the 18 companies who detailed their charges for the research:
- Six charge a drawdown plan set up fee
- Seven set an annual income drawdown fee
- Eight companies charge an annual fee if the income drawdown is from a self-invested personal pension (SIPP)
- Seven companies charge a yearly ‘platform fee’ that can come with annual management charges and additional fees for certain investments
Call for fee cap
Another pension freedom option is the Uncrystallised Fund Pension Lump Sum (UFPLS). Instead of taking a regular monthly income through drawdown, UFPLS allows retirement savers to draw cash from their pensions as they wish.
Fee comparisons reveal that many providers make no charge for this service, but others charge for the first withdrawal each year, such as Charles Stanley Direct (£270). Many firms charge around £100.
Which? wants the government to cap exit charges for savers who want to switch pension providers and clearer fees to allow easier comparison of costs for consumers.
Executive director Richard Lloyd said: “Annuities failed retirement savers and the government overhauled the system to improve how people could access their pension cash. Unfortunately, insurance companies have introduced confusing charges which vary widely that makes this confusing for consumers.”
Meanwhile, pension provider trade body the Association of British Insurers says thousands of people have successfully take £1.8 billion cash from their pensions under the new freedoms.
