Online investment platform True Potential Investor is calling on the government to introduce an annual charge cap on income drawdown pensions in a bid to see more people benefit from last year’s pension reforms. Margaret Taylor talks to managing partner David Harrison.
The firm called for drawdown charges to be capped at 0.75%.
The reforms, which came into effect in April 2015, have given all defined contribution savers over the age of 55 unfettered access to their savings. Recent figures from the Association of British Insurers (ABI) revealed £2.9bn of income-drawdown payments and £3bn of lump-sum payments were made in the first nine months following the changes.
Research from True Potential, which polled more than 4,000 over-55s, found more than two-fifths (42%) of those taking cash out of their pensions reinvested it in property. Applying that percentage to the ABI figures, the platform calculates some £800m has already been diverted from pensions into property since the freedoms were introduced.
According to True Potential, however, that figure could be significantly higher if there was uniformity of pricing across the industry. “One of the reasons why the take-up of pension freedoms is so low is some people thought they could use their pension like a bank account,” said the platform’s managing partner, David Harrison.
“But if someone wants to take money out of their pension to pay off their mortgage, for example, they will need to take advice. Not all pension companies offer income drawdown products, meaning anyone wanting to do that would have to transfer to a provider that does.
“If you transfer from provider A to provider B and they have different charging structures, a lot of work needs to be done to make sure you’re not worse off. But if you’re paying £1,000 for advice on top of transfer charges and tax charges when you only want to withdraw £20,000, you could be put off.”
If a fee cap similar to the one applied on auto-enrolment pensions was introduced, believes True Potential, the process of switching would be easier and, therefore, cheaper.
“A simple solution would be to cap the annual charges on income drawdown pensions,” said Harrison. “That would reduce the volume of advice required and therefore the cost, opening up these freedoms to more people.”
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