Labour proposals to cap “rip-off” drawdown charges could force providers to pull out of the market for small pots, experts warn.
Labour leader Ed Miliband last week confirmed his party would investigate a potential cap on drawdown charges, promising to launch a consultation process immediately.
The Opposition has yet to outline the details of its plans and experts say firm plans are unlikely to arrive ahead of the May general election.
Cicero chief corporate counsel Iain Anderson says: “Labour has been having very active dialogue with the sector to make sure its plans are practical and can work. And they’re going to be continuing that dialogue right the way up to the election.”
However, Talbot & Muir head of technical support Claire Trott says while a cap based on a percentage of a saver’s pot might be attractive to those with smaller funds, it may also result in providers refusing to serve this market.
She says: “You could end up with the larger pots cross-subsidising the smaller pots.
“And if there was a charge cap brought in, I can see providers saying they won’t deal with pots that are too small.
“People assume that for pensions the bigger the pot the more complicated it is but for drawdown, that isn’t the case. It’s a function that we do, and we charge a flat fee because that’s fairer.
“If you let the market mature a bit more, then you are going to have those fees being capped at a reasonable level because people will shop around.”
AJ Bell marketing director Billy Mackay says a charge cap would be a “minefield of compromise and complexity”.
He says: “Labour has a track record of making a hash of these things. If you start in the wrong place you inevitably end up in the wrong place, and to me a drawdown charge cap is starting in the wrong place.
“That market is as competitive as it has ever been and price pressure is working because everyone is fighting over the pension freedoms.
“Charge caps will be an absolute minefield of compromise and complexity.”
Labour’s charge cap plans were unveiled after a Which? report warned a typical pension pot of £36,000 with drawdown of £2,000 a year could be worth £10,300 more with a cap of 0.5 per cent, rather than charges of 2.75 per cent.
Similarly, the consumer body found a 0.75 per cent cap would mean £8,800 more for a saver.
Government older workers’ champion Ros Altmann says: “We have seen in the pension savings market that competition forces do not drive down prices sufficiently across the market.
“There is much customer inertia and misunderstanding, so that some companies may behave well, but others could charge extortionate costs to their customers.
“We have a cap on the accumulation phase to protect consumers and a cap on decumulation options should also be considered – although this might be higher than for the accumulation funds because of the requirements to offer withdrawals.”
TUC policy officer Tim Sharp concedes a charge cap “doesn’t solve every problem”.
He says: “We have always had the problem about how well the market serves smaller savers.
“So a charge cap deals with one problem in rip-off charges but we need to consider other options as well to operate alongside it.
“Longer term, what we would ideally have is a pension systems based on not-for-profit schemes run by trustees with a fiduciary responsibility to act on behalf of their members.”
Alistair Cunningham, director, Wingate Financial Planning
If you are moving into a brave new world where pensions are more like bank accounts, then a cap which can be opted out of when an individual gets advice or does more esoteric things with their funds seems quite reasonable.
But if we are accepting that freedom is a good thing then maybe we also have to accept it will allow people to harm themselves.