Savers tempted into the wrong pension funds with rip-off fees could be the next scandal, as an investigation reveals many could run out of cash. Many pension savers take the easy option of their provider’s funds in retirement. Firms offer to move them into their own funds but these can have big fees
The Probe reveals choosing the wrong fund can leave the retired £13.5k worst off
Investigation reveals pensioners face running out of cash earlier than expected Campaigners fear a pension scandal and are calling for Government action
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By Ruth Lythe for the Daily Mail
PUBLISHED: 11 October 2017
Savers who withdraw regular chunks of cash from their pensions risk £13,500 being gobbled up by expensive funds over their retirement.
Money Mail today reveals how insurers are hitting loyal customers with hefty fees when they try to use the pension freedoms to dip into their pots.
Six in ten people who use the reforms to treat their funds like cash machines are being rolled on to their existing provider’s deal rather than shopping around, according to the City watchdog.
In most cases, insurers offer to move savers’ cash into a small range of investment funds — unless the customer makes a special request. But few savers realise there is a huge difference between the charges on the cheapest and most expensive plans.
And the baffling way that insurers levy the charges makes it almost impossible for customers to compare the true costs.
Our research found savers who fail to shop around for a better deal face losing thousands in extra fees from a £100,000 fund over a 20-year retirement.
If a pensioner’s pot is fed into an expensive fund by default they could also run out of cash up to five years earlier than if they switched plans.
Campaigners warn that savers face a new pensions scandal — and have called on the Government to intervene.
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Former Pensions Minister Baroness Ros Altmann says: ‘If people’s money is being whittled away by charges, their pension is not going to deliver what they hoped.
‘There needs to be some proper controls of this area. It’s vital that the City watchdog gets on top of it straight away.
‘There are already strict limits to how much pension firms are allowed to charge customers when they are working — and it’s equally important they are not overcharged in retirement.’
Senior MPs say they will be examining Money Mail’s findings. Conor Burns, a former parliamentary private secretary in the Department for Business, who is now at the Foreign Office, says: ‘It is most important the savings people have made throughout their working life are protected and they are not short-changed.
‘I would like to see greater transparency so companies have to clearly show charges. Funds that stretch out your money for two to three years longer could prevent someone running out of money in old age, which can be very distressing.’
How savers are tempted into easy option funds
When savers retire, the insurer that looks after the nest egg will normally offer them a range of ways they can access their pot.
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Since April 2015 customers have been allowed to keep their pension money invested and draw it down in chunks rather than buy an annuity which pays an income for life.
Many savers stick with their existing pension provider’s so-called drawdown deals, often as it is a trusted name. But fears are growing that many who stay with the big insurance firms are at risk of being sold expensive deals.
Philip Brown, a boss of one of Britain’s biggest insurers LV=, warned last year that over-55s cashing in their pots were on the ‘cusp of a miss-buying crisis’.
Since the pension freedoms were unveiled more than a quarter of a million savers have piled into drawdown deals.
Many are delighted they no longer have to turn their pensions into annuities. Although annuities pay a guaranteed income, they are rock bottom, paying as a little as £5,180 a year on a £100,000 pot.
When you die the annuity you bought with your pension pot also typically ceases, so effectively the money goes to the insurer — meaning if you pass away within a few years of taking one of these deals your pension company can grab your entire savings pot.
Many retirees signing up for a drawdown have never invested before and are unsure of where to start.
So some of the biggest firms have unveiled their own ‘ready-made’ deals, marketed as a simple and steady place for confused customers to park their cash.
How the easy option funds can cost more
Insurance giant Prudential offers its Retirement Account to existing customers who want to cash in their nest eggs but do not want to pick their own investments.
Investors choose from a range of funds for a product fee of 0.65 percent of their savings each year.
What you do with your pension pot is crucial to how much you will have in retirement
These include its popular PruFund range, which cost another 0.65 percent. Savers can select their fund based on how much risk they wish to take. The riskiest funds are exposed mostly to shares, while the more cautious have only around a fifth tied to the stock market.
Long-standing savers also receive a loyalty discount of 0.25 percent off these charges. With the PruFund range, the money is invested in Prudential’s With-Profits Fund.
Here, your savings are piled together with those of other customers and managed by an investment manager. Some of the return is handed to investors, while the rest is kept to boost your payouts if the fund has a bad day and the stock market crashes.
In theory, this should mean you are less likely to be hit by the full brunt of rises and falls in the stock market.
But the charges mean someone who retired with £100,000 would have £38,565 left in their fund after 20 years with Prudential’s plan, according to data from research by Phil Dawson, director of AMS Retirement.
The figures include annual withdrawals of £4,000, assume 2.5 percent a year investment returns and include Prudential’s discount for its loyal customers.
At Britain’s biggest insurer, Aviva, savers can select their own funds or choose from its six ready-made funds.
These give a choice between ones designed to grow your cash when your money is more exposed to the stock market, and others focused on paying out an income from more cautious investments such as bonds.
Charges vary from 0.35 percent to 0.8 percent. Customers face a charge of 0.4 percent a year to cover the company cost of managing the pot.
The Aviva Investors Distribution Fund, one ready-made fund, is aimed at savers who want an income and charges 0.73 percent a year. They would be left with £38,729 in their pot after 20 years, given the same assumptions as above.
Concerns are growing that investors who stay with big insurance firms are at risk of being sold expensive deals that will erode their pensions
Why moving your pension elsewhere can pay off
If pension investors they put cash into one of the cheaper rivals, instead of ready-made deals offered by Prudential and Aviva, they could be thousands of pounds better off.
If they moved to AJ Bell, a smaller provider, they would pay around £100 a year in admin fees on £100,000 and a 0.25 percent charge on the pot. The firm offers cheaper funds for retirees who want limited risk, such as those offered by investment firm Vanguard at a cost of 0.22 percent a year.
A saver who took this deal would be left with £47,361 after 20 years of retirement — an extra £8,796 compared to the Prudential plan.
With the Vanguard 40 percent Life Strategy Fund, £2 of every £5 in the fund is invested in the UK and overseas shares. The remainder is pumped into gilts and bonds.
A key difference is it tracks the stock market and does not have a fund manager steering it, like the Prudential and Aviva funds. However, it has still performed well. It is up by 4.5 percent in the past year.
Prudential’s PruFund’s 10 to 40 fund, which has around 40 percent of its investments exposed to the stock market, is up 5.6 percent over the past year. Aviva’s Investors Distribution fund is up by 4.6 percent.
You could save even more with the Royal London drawdown plan. The fee for its fund range is 1 percent.
There is also a discount of up to 0.65 percent, depending on the size of your pot. After 20 years in our example, you would be left with £52,219 — or £13,654 more than with Prudential.
The funds are actively managed and can be tailored to the desired risk level.
The Royal London Governed Retirement Income Portfolio 4 fund, which is designed for drawdown and has around 40 percent of your money in shares, is up 9.1 percent in the past year.
While it is always best to shop around for a better deal, you may find it worth sticking with the firm you have always saved with in the end.
Many savers with Legal & General have money moved to the firm’s Retirement Income Multi Asset Fund 3. It is up 6.4 percent over the past year and has charges of 0.23 percent. There is a £50 charge to set up an L&G drawdown pension.
Over 20 years you would have £49,436 left, assuming withdrawals of £4,000 and 2.5 percent growth — £10,871 more than the expensive deals.
Pensioners investing for retirement should make sure they seek out the best deal – and ideally consider paying for good independent financial advice
Higher charges raise the risk of running out of money
The charges levied by the big firms mean elderly savers are put at more risk of running out of money.
A saver with Pru or Aviva who withdrew £4,000 from age 60 would see their fund run out by age 90. With Royal London, the pot would run out at the age of 95.
The difference in charges may not look big, but over time can eat away at your pot
Pensions expert Billy Burrows, of the advisers Better Retirement, said: ‘These figures highlight the crucial importance of shopping around for the best deal you can find and not taking the first thing you are offered.
‘The difference in charges may not look big, but over time can eat away at your pot.’
An Aviva spokesman says: ‘Aviva’s consumer platform offers very competitive charges, particularly for those with less than £100,000 to invest.
‘Unlike some, our charges apply to the combined total investment in a customer’s Sipp (Self-invested Personal Pensions) and Isa, and we do not levy additional charges for drawdown, transferring out or arranging death benefits. We also offer a range of ready-made investment options from as low as 0.35 percent .’
A Prudential spokesman says: ‘Comparing funds on charges alone is misleading and disregards long-term returns — the priority for most investors. PruFund is actively managed, with positive and stable long-term returns, and helps protect investors from market volatility.’#
Rob Yuille, head of retirement policy at the Association of British Insurer’s trade body, says: ‘Flexible income products are more widely available since the pension freedoms. This research does not reflect most people’s experience.’