How to avoid rip-off fees with your pension

Here are the things you should look out foor to avoid being ripped-off with your pension

Savers who have cashed in their pensions under new freedoms introduced by the government (to give them more control of their retirement savings) are losing up to £13,000 in rip-off fees.

A new report by the Financial Conduct Authority, the City watchdog, says people could face up to 44 separate and hidden charges when they start to draw down on their funds. In the worst cases, they could be paying more than ten per cent of their entire pension fund in fees to advisers or companies.

So how can you ensure that your pension is in the best place to preserve your funds and provide income for the future?

 

The pros and cons of pensions freedom

As a result of the new pensions flexibility you are no longer obliged to buy an annuity with your pension fund when you retire. People can instead draw down on their funds as and when they need them.

What’s more, if you have a small pot of money, you might be able to take the whole amount as a cash lump sum. However, this is not something you should do without taking professional advice, as you may be liable to an extra tax charge.

Pensions freedom has been very popular—flexible payments from pensions totalled over £6.5 billion in 2017, according to figures published by HM Revenue & Customs (HMRC).

 

Draw down

Draw down has become popular because not everyone needs their pension as soon as they retire. You may have savings and investments outside a pension, or you might decide to continue working part-time, in which case your need for pension income may be lower.

Draw down allows you to keep your pension fund invested and take cash in one-off or regular amounts. It’s useful if you need to supplement your income but you don’t want to buy an annuity.

It also works for people who want to wait until they are in a different position, tax-wise, before taking additional income. They can leave the funds invested and not draw on the money. In this scenario, careful planning with the help of a financial adviser could reduce the amount of tax you might potentially need to pay.

 

Cashing in your pension

Cashing in your pension has become common among people with small funds. However, you should think very carefully before you take this route—you will most likely have to pay extra tax, and you may be hit by exorbitant fees.

You can find out more information here.

 

What are the rip-off fees?

A report from the FCA says that around 100,000 savers are at risk of “complex and opaque” charges levied by insurers when they begin to withdraw money from their pensions.

It found that some pensioners were overpaying by as much as £650 a year on a £100,000 pension pot—or £13,000 over a retirement spanning twenty years.

The FCA discovered that charges vary considerably from 0.4 per cent to 1.6 per cent between providers and can often be confusing and hard to compare. If people saw how much they were paying in a single, annual figure, that might help them to understand.

Even if they have escaped the high fees, their money might not be working as hard as it could for them. The FCA says 50,000 savers are missing out on a third of their potential retirement income—or about £1,500 a year—because their money has been moved into a poor-value cash fund that pays little or no interest.

 

What's the solution?

The FCA believes people need to think through their options very carefully before they make lasting decisions about their pension funds.

“For many, retirement income choices start with a decision to access tax-free cash rather than other questions,” the FCA says. “At that point, consumers face a range of complex decisions such as which provider to use, where to invest their remaining pot and how quickly to drawdown. They also need to think about how long they expect to live. We found many consumers who do not take advice struggle with these decisions, and many end up in investments that may not be right for them, including in cash.”

When you are thinking of cashing in your pension, moving it to another manager, or going into draw down, pay particularly close attention to the fees. These may be difficult to understand, and could be a combination of one-off and ongoing charges.

That’s why it is a good idea to seek advice from a financial adviser, chartered financial planner, or from the Pensions Advisory Service, which is a government scheme to offer free and impartial advice to people with workplace pensions and personal pensions. 

The Pensions Advisory Service will be able to explain your options and talk through what your retirement goals are in financial terms. Got to pensionsadvisoryservice.org.uk or call 0800 011 3797 for more information.

 

Tough new rules

The FCA has announced it will introduce tough new rules to protect customers falling victim to unfair and ongoing pension charges. This could include a cap on fees; forcing insurers to spell out charges in monetary terms rather than percentages, and banning them from automatically moving customers into poor-value cash funds in retirement.

Until that happens, it is important to think through all the options carefully before you withdraw some or all of the cash from your pension.

 

Thinking ahead

The FCA thinks that the earlier we all think about pensions, the better. Because of this, it’s proposing that “wake-up” packs should be sent to customers from the age of 50 and then every five years until the customer has fully accessed their pension pot.

This will give people a summary of how much pension they can expect to have, and explain whether there is likely to be a shortfall in their anticipated retirement income.

There will also be information about the risks and choices they face and information about where to find support and guidance.