Following a two year investigation, the regulator has revealed that some pension providers impose up to 44 different types of charges to access money under pension freedoms, leaving many confused as to whether they have a good pension or a bad pension.
On Top Of Paying Charges For Decades As You Build Your Pension Fund, You Could Be Hit With Even Higher Costs When You Access Your Money!
It Seems The Pension Industry Is Superb At Extracting Your Money For Its Benefit
With annuity rates at stubbornly low levels, pension freedoms have enabled people to withdraw around £20 billion since they were introduced in 2015.
It’s great news if you want to spend your pension fund at an early age, while you’re still fit and healthy and able to benefit from the money.
But it’s a double-edged sword, for there are several downsides.
Arguably, the top three are shown below.
1. Unless you pay close attention to where your pension is invested, charges could seriously damage your wealth. Over a retirement of 20 years, The Telegraph calculated that someone with £100,000 pension pot in a flexible fund would be left £36,781 poorer in the most expensive pension compared with the most competitive.
2. As many people have been making more than one pension withdrawal a year, they’re often paying considerably more Income Tax than is necessary. It’s great news for UK PLC, which has had a rather large unexpected tax windfall, but on a personal basis, it’s often an expensive pension mistake.
3. Obviously, you can’t spend your pension money twice. So if you withdraw a significant amount of your pension fund in the earliest years of your retirement, you might find you’re very short of income at a later date. Relying on the State Pension to pick up the tab isn’t likely to be a profitable plan.
Three Ways Your Pension Could Lose Out
The Financial Conduct Authority’s Pension Review
In addition to the regulator unearthing the fact that many consumers were confused by opaque fee structures, it discovered the most expensive pension providers were four times more costly than the cheapest pension providers.
In some cases, charges could be more than doubled at the point you want your money, compared to those levied as you grew your pension fund.
Unsure where they should invest their remaining pension fund to avoid losing any money, the report found that a significant number of people had invested in cash or cash-like investments. The actual buying power of this money was being eroded year-by-year as a result of the effect of inflation and pension charges.
The report also concluded that up to 13 per cent of consumers could boost their retirement income by switching to a pension provider with lower charges. However, whilst that’s fine in principle, it’s not always a given, as Derrick Cameron discovered when he was told he’d have to pay 45 per cent to move his shrinking pension pot.
If you’re interested in the detail, here’s the regulator’s pension review.
Five Risks You Need To Consider As You Access Your Pension
Individually, any of the above disadvantages could make a real hole in your retirement money. But because it’s usually the case that you’re hit by more than one of the above things at the same time, the effect can be very damaging.
Unfortunately, it doesn’t end there.
Here are five further risks you face as your access your pension.
No-one can predict how long they’re going to live. In fact, survey after survey reports that people under-estimate their life expectancy. Whilst an annuity removes longevity risk as it’s paid for life, you need to be mindful that under pension freedoms, you can easily run out of cash well before you run out of life.
Unless your investments are designed to provide you with a real return on your money, which inevitably involves you bumping into many other kinds of pension risk, over the years of your retirement, inflation can seriously erode the value of your savings.
This isn’t just about poor investment returns, which obviously affects your ability to withdraw money from your pension fund. It’s as much to do with when you withdraw your money. Often referred to as sequencing risk or ‘pound cost ravaging’, drawing out cash when your pension fund is down effectively crystallises losses that would otherwise be ‘losses on paper’.
Simply not having a large enough pension pot to cover your expected retirement needs is a problem experienced by many people. You can use ‘cashflow modelling’ tools to determine how long your money might last. And if you’re still growing your pension fund, it’s an extremely worthwhile exercise to head off a future issue.
It’s a fact of life. Things change. And in recent years, a lot has changed in relation to pensions, including taxation, legislation, flexibility and more. You can only cope with detrimental changes by having a contingency fund. In simple terms, it’s easy: save more than you think you might need. You know, no-one ever complains they have too big a pension income, but sadly, millions complain their pension isn't large enough!
What Can You Do About Excessive Pension Charges
The first step is to ask your pension provider for a detailed breakdown of all the charges it levies. Here's what your pension review should comprise.
And once you're aware of the extent of the problem, if you're looking for a SIPP, we have two comparison services.
And if you have a SSAS, we have a SSAS comparison service too.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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