The City regulator faces renewed calls to cap charges on popular pension drawdown accounts as consumer campaigners warn high fees risk leaving retirees tens of thousands of pounds worse off in later life.
Drawdown, where retirement savings are left invested, rather than turned into a secure income, has in recent years become the most popular way for over-55s to take their retirement pot.
Around 200,000 over-55s opened a drawdown account last year, with about two-thirds of those doing so on a do-it-yourself basis, or without the help of an adviser, to choose a suitable product, in a field notorious for complex fee structures.
However, there is currently no cap on the fees that can be levied by pension providers on retirement money invested in drawdown.
This contrasts with the 0.75 per cent ceiling on annual management charges protecting millions of savers automatically enrolled into workplace pensions.
Speaking at a City webinar this week, Dominic Lindley, director of policy with New City Agenda, a think-tank co-founded by a former chair of the Treasury select committee, said the 0.75 per cent cap should also be applied to drawdown.
“Most people without access to advice take the path of least resistance, and there is very limited shopping around and switching,” Lindley said.
“The Financial Conduct Authority has a lot of faith in disclosure [of fees]. We need to help as many people shop around as possible but also protect those who don’t or can’t shop around.”
“Regulators need to set clearer standards for drawdown products including default investment, communication and withdrawal pathways and a charge cap.”
In February government analysis confirmed that typical fees for workplace pension savers were around 0.48 per cent, far lower than the 0.75 per cent charge cap.
Analysis of 28 drawdown providers last year by Which?, the consumer campaign group, found DIY investors could, in total, expect to pay between 0.5 per cent and 1.25 per cent in annual charges (including fund fees) for pension drawdown.
The Which? research found that fees could erode a pension pot by tens of thousands of pounds over the course of a typical retirement.
Over 20 years, taking 5 per cent a year out of an initial fund of £250,000 could rack up fees as high as £47,000 (Aegon) — £12,300 more than the cheapest options (Interactive Investor and Halifax Share Dealing, whose charges total £34,700), according to the Which? analysis.
“The FCA has refused to introduce a charge cap, which has left customers who don’t take financial advice inadequately protected from excessive charges that can end up costing them tens of thousands of pounds over a number of years.”
In February, the FCA introduced measures to make it easier for DIY drawdown investors to shop around and compare charges for new “investment pathway” products.
Investment Pathways are pre-determined fund options offered by providers which are designed to help DIY pension investors make choices that better suit their objectives. However, the regulator has not capped fees on these popular investment products.
“The introduction of investment pathways should also make it easier for non-advised consumers to select appropriate drawdown products,” said the FCA.
“We will look at the issue of charges when we review the pathways in 2022 and take action if necessary.”