Savers tempted into the wrong pension funds could be £13.5k worse off – shopping around pays off

Thisismoney.co.uk

– Many pension savers take easy option of their provider’s funds in retirement
– Firms offer to move them into their own funds but these can have big fees
– Probe reveals choosing the wrong fund can leave the retired £13.5k worse off
– Shopping around essential

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 make 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.

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, 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 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.

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 per cent a year investment returns and include Prudential’s discount for its loyal customers.

Why moving your pension elsewhere can pay off

Insurer Royal London’s drawdown plan has a fee for its fund range of 1 per cent.

There is also a discount of up to 0.65 per cent, 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 a desired risk level.

The Royal London Governed Retirement Income Portfolio 4 fund, which is designed for drawdown and has around 40 per cent of your money in shares, is up 9.1 per cent in the past year.

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.’

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This entry was posted by John on Wednesday, December 27th, 2017 at 11:39 am and is filed under Pension news.