Pensions with rip-off fees could be the next scandal
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Savers who withdraw regular chunks of cash from their pensions risk £13,500 being gobbled up by expensive funds over their retirement.
Money Mail today reveals how insurers are hitting loyal customers with hefty fees when they try to use the pension freedoms to dip into their pots.
Six in ten people who use the reforms to treat their funds like cash machines are being rolled on to their existing provider’s deal rather than shopping around, according to the City watchdog.
In most cases, insurers offer to move savers’ cash into a small range of investment funds — unless the customer makes a special request. But few savers realise there is a huge difference between the charges on the cheapest and most expensive plans.
And the baffling way that insurers levy the charges make it almost impossible for customers to compare the true costs.
Pensioners who regularly withdraw cash from their funds face hefty charges from insurers
Our research found savers who fail to shop around for a better deal face losing thousands in extra fees from a £100,000 fund over a 20-year retirement.
If a pensioner’s pot is fed into an expensive fund by default they could also run out of cash up to five years earlier than if they switched plans.
Campaigners warn that savers face a new pensions scandal — and have called on the Government to intervene.
Former Pensions Minister Baroness Ros Altmann says: ‘If people’s money is being whittled away by charges, their pension is not going to deliver what they hoped.
‘There needs to be some proper controls of this area. It’s vital that the City watchdog gets on top of it straight away.
‘There are already strict limits to how much pension firms are allowed to charge customers when they are working — and it’s equally important they are not overcharged in retirement.’
Senior MPs say they will be examining Money Mail’s findings. Conor Burns, former parliamentary private secretary in the Department for Business, who is now at the Foreign Office, says: ‘It is most important the savings people have made throughout their working life are protected and they are not short-changed.
‘I would like to see greater transparency so companies have to clearly show charges. Funds that stretch out your money for two to three years longer could prevent someone running out of money in old age, which can be very distressing.’
When savers retire, the insurer that looks after the nest egg will normally offer them a range of ways they can access their pot.
Since April 2015 customers have been allowed to keep their pension money invested and draw it down in chunks rather than buy an annuity which pays an income for life.
Since 2015 customers have been allowed to keep pensions invested and can draw in chunks
Many savers stick with their existing pension provider’s so-called drawdown deals,often as it is a trusted name. But fears are growing that many who stay with the big insurance firms are at risk of being sold expensive deals.
Philip Brown, a boss of one of Britain’s biggest insurers LV=, warned last year that over-55s cashing in their pots were on the ‘cusp of a mis-buying crisis’.
Since the pension freedoms were unveiled more than a quarter of a million savers have piled into drawdown deals. Many are delighted they no longer have to turn their pensions into annuities. Although annuities pay a guaranteed income, they are rock bottom, paying as a little as £5,180 a year on a £100,000 pot.
When you die your pension pot also typically goes to the insurer — meaning if you pass away within a few years of taking one of these deals your pension company can grab your entire savings pot.
Annuities pay sometimes pay £5,180 a year on a £100,000 pot
Many retirees signing up for a drawdown have never invested before and are unsure of where to start. So some of the biggest firms have unveiled their own ‘ready-made’ deals, marketed as a simple and steady place for confused customers to park their cash.
For example, insurance giant Prudential offers its Retirement Account to existing customers who want to cash in their nest eggs but do not want to pick their own investments.
Investors choose from a range of funds for a product fee of 0.65 per cent of their savings each year. These include its popular PruFund range, which cost another 0.65 per cent. Savers can select their fund based on how much risk they wish to take. The riskiest funds are exposed mostly to shares, while the more cautious have only around a fifth tied to the stock market.
Long-standing savers also receive a loyalty discount of 0.25 per cent off these charges. With the PruFund range, the money is invested in Prudential’s With-Profits Fund. Here, your savings are piled together with those of other customers and managed by an investment manager. Some of the return is handed to investors, while the rest is kept to boost your payouts if the fund has a bad day and the stock market crashes.
In theory this should mean you are less likely to be hit by the full brunt of rises and falls in the stock market. But the charges mean someone who retired with £100,000 would have £38,565 left in their fund after 20 years with Prudential’s plan, according to data from research by Phil Dawson, director of AMS Retirement
The figures include annual withdrawals of £4,000, assume 2.5 per cent a year investment returns and include Prudential’s discount for its loyal customers. At Britain’s biggest insurer, Aviva, savers can select their own funds or choose from its six ready-made funds.
These give a choice between ones designed to grow your cash when your money is more exposed to the stock market, and others focused on paying out an income from more cautious investments such as bonds. Charges vary from 0.35 per cent to 0.8 per cent . Customers face a charge of 0.4 per cent a year to cover the company cost of managing the pot.
The Aviva Investors Distribution Fund, one ready-made fund, is aimed at savers who want an income and charges 0.73 per cent a year. They would be left with £38,729 in their pot after 20 years, given the same assumptions as above.
But if they put cash into one of the cheaper plans, instead of ready-made deals offered by Prudential and Aviva, they could be thousands of pounds better off.
If they moved to AJ Bell, a smaller provider, they would pay around £100 a year in admin fees on £100,000 and a 0.25 per cent charge on the pot. The firm offers cheaper funds for retirees who want limited risk, such as those offered by investment firm Vanguard at a cost of 0.22 per cent a year.
A saver who took this deal would be left with £47,361 after 20 years of retirement — an extra £8,796 compared to the Prudential plan.
Concerns are growing that investors who stay with big insurance firms are at risk of being sold expensive deals that will erode their pensions
With the Vanguard 40 per cent Life Strategy Fund, £2 of every £5 in the fund is invested in UK and overseas shares. The remainder is pumped into gilts and bonds.
A key difference is it tracks the stock market and does not have a fund manager steering it, like the Prudential and Aviva funds. However, it has still performed well. It is up by 4.5 per cent in the past year.
Prudential’s PruFund’s 10 to 40 fund, which has around 40 per cent of its investments exposed to the stock market, is up 5.6 per cent over the past year. Aviva’s Investors Distribution fund is up by 4.6 per cent.
You could save even more with the Royal London drawdown plan. The fee for its fund range is 1 per cent. There is also a discount of up to 0.65 per cent, depending on the size of your pot. After 20 years in our example, you would be left with £52,219 — or £13,654 more than with Prudential. The funds are actively managed and can be tailored to a desired risk level.
Since April 2015 more than a quarter of a million savers have opted for drawn down deals
The Royal London Governed Retirement Income Portfolio 4 fund, which is designed for drawdown and has around 40 per cent of your money in shares, is up 9.1 per cent in the past year. While it is always best to shop around for a better deal, you may find it worth sticking with the firm you have always saved with in the end.
Many savers with Legal & General have money moved to the firm’s Retirement Income Multi Asset Fund 3. It is up 6.4 per cent over the past year and has charges of 0.23 per cent. There is a £50 charge to set up an L&G drawdown pension.
Over 20 years you would have £49,436 left, assuming withdrawals of £4,000 and 2.5 per cent growth — £10,871 more than the expensive deals.
The charges levied by the big firms mean elderly savers are put at more risk of running out of money. A saver with Pru or Aviva who withdrew £4,000 from age 60 would see their fund run out by age 90. With Royal London, the pot would run out at the age of 95.
Elderly savers are being advised to search for the best deals with insurance companies
Pensions expert Billy Burrows, of the advisers Better Retirement, said: ‘These figures highlight the crucial importance of shopping around for the best deal you can find and not taking the first thing you are offered.
‘The difference in charges may not look big, but over time can eat away at your pot.’
An Aviva spokesman says: ‘Aviva’s consumer platform offers very competitive charges, particularly for those with less than £100,000 to invest.
‘Unlike some, our charges apply to the combined total investment in a customer’s Sipp (Self-invested Personal Pensions) and Isa, and we do not levy additional charges for drawdown, transferring out or arranging death benefits. We also offer a range of ready-made investment options from as low as 0.35 per cent .’
A Prudential spokesman says: ‘Comparing funds on charges alone is misleading and disregards long-term returns — the priority for most investors. PruFund is actively managed, with positive and stable long-term returns, and helps protect investors from market volatility.’
Rob Yuille, head of retirement policy at the Association of British Insurers trade body, says: ‘Flexible income products are more widely available since the pension freedoms. This research does not reflect most people’s experience.’