• FCA analysis suggests total charges in pension drawdown can range from 0.4% to 1.6%*
• Paying the highest charge vs the lowest charge could result in an investor with a £100,000 pension missing out on £32,000 in retirement income and potentially running out of money
• Vital savers put costs and charges front-and-centre when choosing a retirement income option
• Top tips for retirement income investors
Tom Selby, senior analyst at AJ Bell, comments:
“High charges are a slow, lethal killer when it comes to making the most out of your pension in retirement. Savers should shop around the market to get the best deal possible, and stay on top of their retirement pot by reviewing it regularly (at least once a year).
“The good thing about drawdown is that you aren’t locked in, so if you want to switch investments or provider you are free to do so at any time.
“It is over the long-term that charges can have a really big impact on your retirement. Let’s take the two extremes cited by the FCA – 0.4% at the bottom end and 1.6% and the top. While neither of those charges sounds massive, over time the 1.2 percentage point difference could take a serious toll.
“Take someone with a £100,000 pension pot at age 65 who starts withdrawing £5,000 a year from their fund and increases that each year in line with inflation.
“If we assume a 5% investment return each year, a 0.4% charge would see the fund run dry by age 92. Given life expectancy for a 65 year old woman is 88, that person could be quite confident that their pension withdrawals would last their whole life and they would have received a healthy £177,000 of income from their pot in total.
“However, if we increase the charge to 1.6% and keep everything else the same, the fund runs out by age 88 which is cutting it fine in relation to life expectancy and the individual has received just £144,000 in income. So an additional £32,000 has been swallowed up in fees over the course of their retirement.
“Charges are not the be-all-and-end-all, but it is an indisputable fact that by keeping costs as low as possible, savers can squeeze thousands of pounds more out of their hard-earned pensions.”
How high charges can eat away at a pension savers’ retirement funds
|
Fund value |
Total retirement income (1.6% charge) |
Total retirement income (0.4% charge) |
Total retirement income lost with high charge provider |
|
£500,000 |
£721,124 |
£883,608 |
£162,484 |
|
£250,000 |
£360,562 |
£441,804 |
£81,242 |
|
£100,000 |
£144,225 |
£176,722 |
£32,497 |
|
£50,000 |
£72,112 |
£88,361 |
£16,249 |
|
£30,000 |
£43,267 |
£53,016 |
£9,749 |
Notes: Figures based on 5% annual investment returns before charges and 5% annual withdrawals of the initial fund value, rising in line with 2% inflation. Total retirement income lost assumes investor lives long enough to exhaust their fund.
Top tips for retirement income investors
1. Shop around the market, both for the right product (usually annuity, drawdown or a mix) and the right provider
2. Keep a close eye on costs and charges, and be ready to switch if you can get a better deal elsewhere
3. Avoid overtrading (buying and selling investments too often in retirement) as this could push up your costs
4. Review everything – from provider to how much you’re withdrawing and your investment choices – regularly
5. Don’t stick your head in the sand! Almost a third (30%) of people who had entered drawdown since April 2015 we surveyed had no idea what had happened to their fund since. If markets take a dip you may need to look again at how much you’re withdrawing or risk running out of money early. If you don’t review you’re effectively trusting to blind luck that your retirement income plan will remain on track
*Source: FCA Retirement Outcomes Review final report
