Pensions experts say a proposed cap on charges levied on drawdown funds will not work because the concept of a default fund does not apply to the drawdown market.
In a consultation paper launched this week, the Labour-backed Independent Review of Retirement Income asked whether drawdown products should be subject to a charge cap.
The consultation, led by Pensions Institute director David Blake, aims to “evaluate the predictability and value for money of the lifelong retirement income” produced by defined contribution pension schemes.
There is a 0.75 per cent charges cap on the default funds of auto-enrolment schemes but this does not cover drawdown products.
Shadow pensions minister Gregg McClymont says: “I welcome the announcement by David Blake’s Independent Review of Retirement Income that they are studying the case for a new charge cap on pension products offered to savers by their pension provider to replace annuities.”
But AJ Bell technical resources manager Gareth James says: “A cap is only likely to have any chance of working in conjunction with a default fund. The question needs to be asked how appropriate a default fund is likely to be with drawdown options as flexible as those we will soon see.”
Old Mutual Wealth retirement planning expert Adrian Walker says introducing a cap “may be feasible” for workplace schemes, “depending on the demographics of that employer’s scheme”.
But for schemes open to individuals, he says: “To create a default fund simply to move inside a charge cap, there is a danger many people could end up in an environment where the default is not appropriate for them.”
Walker adds it would be “very difficult” for Sipp providers to create a default fund for all their clients.
Standard Life head of workplace strategy Jamie Jenkins says: “It seems a bit premature to discuss a charge cap with a market we don’t yet understand.”
He adds: “It’s quite different from auto-enrolment. We have a charge cap on auto-enrolment funds primarily because the Office of Fair Trading asserted there was a weak buy side in the market because individuals themselves do not choose schemes but that will be very different in the flexible retirement world. Most people will shop around from their scheme to choose a product that suits them.”
But Towers Watson senior consultant Will Aitken says: “If we’re saying people need protection when they’re building up a fund, it seems inconsistent to say they don’t need protection when their pot’s at its biggest. You can argue people going into drawdown know what they’re doing but we can’t assume that.”
The consultation closes on 20 February 2015.
Wingate Financial Planning
A 0.75 per cent charge on drawdown without the member seeing an adviser seems reasonable. However, drawdown is, by its nature, a complicated product. We would discourage anyone from going into drawdown without advice. It’s a lot harder to do damage by auto-enrolling somebody than by taking more out of your pot than you should.
Basi & Basi Financial Planning
Caps on charges can be useful but they can also promote a race to the bottom. We need some figures from the industry rather than putting a finger in the air. There are some very cheap drawdown products and when you set a cap, people are encouraged to hit it.