Several players within the pensions sector have started to implement “disruptive” fees and charges plans, a trend that could mean good news for investors in the long run, says advisory firm LCP.
For example, the Vanguard Sipp’s annual account fee is now at 0.15% capped at £375 ($514, €424); platform Interactive Investor removed its drawdown fee on its Sipp in October 2020; while AJ Bell followed suit with the removal of pension freedoms charges and by setting its platform fee at up to 0.25%.
A study by The Lang Cat in November 2020 showed that, in the next five years, charges for private wealth investors could fall by a third to 1.35% a year from 2.18%.
These comprise of platform fees, ongoing charges figure, advice fees, and DFM charges.
The forecast comes hand-in-hand with a “significant discrepancy” on charging for non-advised investors, publication Which found.
The difference between the most and the least expensive plans was 0.5% per annum, which increased to 1.5% when the individual provider’s charges for drawdown funds were included.
Charges one of ‘most important’ attributes
Analysis by LCP revealed that reducing average charges by around 0.8%, and compressing the range of fees by bringing the more expensive products in line with today’s pricing, would create a “much-needed boost for retirees, and will help combat the impact on investment returns of a sustained period of low yields”.
The firm provides the example of a 1% drop for a £500,000 pot, which could mean that:
- By age 80, a retiree could have, on average, £60,000 more in their fund under lower charges;
- By age 87, the pension would be, on average, more than twice as valuable;
- Pensions would last four years longer and,
- Retirees would be able to leave “substantially more money” as an inheritance.
LCP said that around a million people reach retirement age each year with the option to drawdown their pension to provide an income in retirement, many withdrawing at “unsustainable levels”.
“There are a number of steps retirees and advisers can take to improve the situation, one of which is to focus on bringing down their total charges,” LCP added.
Dan Mikulskis, partner at LCP, said: “Even apparently small changes in charges – just a fraction of 1% – can make a real difference to your income in retirement. This analysis highlights the vital importance of knowing what charges you are paying and shopping around as you approach retirement.”
Mikulskis added that finding providers offering lower charges may be one of the ways to make a pension last longer.
“This is likely to be one of the most financially meaningful decisions a lot of people make in their lifetime, with the cost of sticking with an expensive product running into many tens of thousands of pounds,” he said.
“Retirees should definitely shop around and consider this the same way they would a house purchase or a mortgage. Getting a handle on the total fees you are going to be paying and comparing this with what is available in the market is vital.
“With around £28bn of assets entering drawdown each year, the industry could do a much better job of making charges clear and transparent so consumers understand what they are paying and get better value for money.
“Charges shouldn’t be a footnote or buried in small print, they are one of the most important attributes of a retirement product,” Mikulskis added.