In all the commentary on the best retirement options pension drawdown charges are rarely mentioned. While, for many, drawdown may be a more attractive option in the current market than an annuity it is important to choose the right drawdown product and fully understand fees and charges to make an informed decision.
It is important to understand what pension drawdown charges may be applied, identify the level of those charges and calculate the impact on long-term investment value. Fees and charges can reduce investment value by tens of thousands of pounds over the long term. It is important to choose the right drawdown option to deliver the required flexibility at an acceptable cost.
What Is Pension Drawdown?
In drawdown, a pension fund is managed appropriately to provide tax-free cash and an income. The income may be in the form of lump sums and/or regular or ad hoc withdrawals. It is up to the individual to manage the pension fund as an investment to ensure it lasts a lifetime.
Drawdown is a flexible solution with a number of advantages over its chief competitor, an annuity; but it does have risks. Existing pension arrangements may not offer a drawdown option and it may be necessary to transfer to a different pension fund. Some drawdown arrangements do not offer the same level of flexibility as others.
Fees Erode Investment Value
All pension arrangements have some level of fees (see below) applied. These may be charged as a lump sum or as a percentage of the fund value (or both). As a lump sum fees may be a few tens of pounds to low hundreds. As a percentage of the fund, they may be significantly less than one percent per annum.
The level of fees may, therefore, seem trivial but the cumulative value over an extended period of up to 25 years can be significant. As an example where a fee is applied as a percentage of the total fund, an increase of just 0.5% in that fee can result in tens of thousands of pounds of lost investment value over a 25 year period.
Types Of Pension Drawdown Charges
There are a wide number of potential fees that may be applied, they include:
- Drawdown set up fee.
- Transfer in fee.
- A charge to convert from capped drawdown.
- Charges for one-off or regular withdrawals.
- A fee to transfer out.
- Advisor fee.
- SIPP setup and management fees.
- Annual management charges applied to funds.
- Charges levied by the fund managers on the money that remains invested.
It is unlikely all of these fees will apply. Some providers will charge some fees but not others. Some providers may charge a significantly higher fee for one or more item than the industry average. Making a direct comparison between two or more options can, therefore, be difficult. Worse still, those without the relevant experience can find some fees are difficult to spot in the documentation delivered by providers.
There is little doubt (particularly in the current market) drawdown offers a number of advantages when compared to an annuity but it is important to understand the true costs of drawdown. To maximise investment growth it is vital to choose the right drawdown product, understand the pension drawdown charges and the potential impact of those fees.
There may be a cost associated with taking professional advice but that should be measured against the cost of taking inappropriate decisions. Should you wish to talk through how drawdown may work for you (no cost and no obligation) then call us on 0800 043 8341, email us at email@example.com or simply complete the contact box below and we will call you.
The information in this article does not constitute financial or other professional advice. You should not take action on the basis of this article without seeking regulated independent financial advice that addresses your specific circumstances.