In all the commentary on retirement options pension drawdown charges are rarely mentioned. Given current market conditions and the relatively low value of annuities drawdown can be a attractive option. However, it is important to fully understand fees and charges to make an informed decision. If taking the drawdown route it is important to choose the right drawdown product.
It is vital to understand what pension drawdown charges may apply, 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 product to deliver the required flexibility at an acceptable cost.
Charges 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). 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 can vary substantially depending on the provider and the chosen plan but charges typically apply to set up a drawdown pension arrangement and each time benefits are withdrawn. Often annual administrative charges are also applied.
As an example, the most common type of pension for drawdown arrangements is a Self Invested Personal Pension (SIPP). To set up a SIPP typically costs up to £500, a fee of a few hundred pounds applies when income is first withdrawn, there is an annual management fee costing from zero to over £1000 depending on provider and trading fees of a few pounds each time an investment is bought/sold. These fees can soon add up to erode the value of a pension pot in drawdown.
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 (If applicable).
- 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 items 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.
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.
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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.