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Labour to consult on drawdown charge cap plans

Labour leader Ed Miliband will today set out plans to consult on capping fees and charges on pension drawdown products.

The announcement of the proposal comes after Labour first floated a cap in November last year as part of a party-backed independent review of the retirement income market.

In a speech in Redcar later today, Miliband will say: “We will act to protect savings by capping rip-off fees and charges on new pension products coming on the market now so that when people draw money out of their hard-earned pension pot, they have similar protections as they do when they put money in.”

While Labour says it supports the incoming pension freedoms, it has expressed fears that savers could be hit by charges affecting their pension savings.

Labour says it will begin consulting on the charge cap proposal immediately, although it is not clear whether details on the level of the cap or how it would be applied will be published ahead of the May general election.

In particular, the party will seek input from stakeholders over products bought from a saver’s own pension provider.

Research from Which? published earlier today found that 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 that a 0.75 per cent cap would mean £8,800 more for a saver.

Meanwhile, Q4 stats from the Association of British Insurers show that drawdown sales have doubled year-on-year, while new annuity business plummeted 64 per cent.

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. The logic behind the charge cap for AE schemes was that individuals were being enrolled into them automatically, without making any active decision. The view was that you shouldn’t push someone into a “poor value” pension scheme that they haven’t chosen.

    Nobody, unless Which? get their way, will be pushed into drawdown unless them make an active decision to pursue that course of action. As such, they will have free choice of any of the many drawdown providers out there. If they want a cheap solution there are providers out there that can offer very cheap drawdown products, with charges below the current cap for AE schemes, although that obviously wouldn’t cover advice on investments. A cap on drawdown charges is completely unecessary, since low cost options are there for those that choose to use them.

    If Labour’s concern is that poor, unsuspecting people are going to be hoodwinked into a high charging drawdown product by evil financial advisers, perhaps they would also like to consider a charge cap on a few other things, too? A lot of people spend hundreds of pounds on and iPad when they could do a lot of the same things on a budget tablet for a quarter of the price. Why not cap the cost of all tablets at say £200? I’m sure all those people who wanted a premium tablet and liked the way Apple do things will be overjoyed to have been saved from “rip off tablet maunfacturers draining them of their hard-earned wages”.

  2. One could raise the question of why Which? appear to have chosen £36,000 as the typical pension pot for drawdown, when the UK Financial Services regulator says that such products are unlikely to be suitable for funds less than £50,000.

  3. Once again pensions being used for political points scoring. Am I the only one sick and tired of hearing the phrases ‘rip off charges’ and ‘hard earned pension pots’ with no empirical evidence to support these throwaway statements.

    There is too much focus on how reducing charges will increase the pot; hardly surprising its simple maths.

    The same argument could be used for mortgages, which the majority of the population spend a hell of a lot more on, so why not cap interest rates being charged?

    Where did Which? get these figures from; did they make them up because most drawdown pensions I know, excluding true SIPP’s which are more labour intensive, have charges in the 1% p.a. range.

  4. Can we please put a cap on the cost of all our MPs ? A country this size doesn`t need over 600. Half it, put them on DC Pensions, capped expenses etc and we could save a fortune.I`m struggling to think of any MP in the last 20 years who is worth the money they are paid.

  5. @ Mick Hudson – the other point to be aware of is that the 2.75% plan is a full SIPP – hardly the first port of call for a £38k fund (unless you’re buying a commercial property for £37k or so!)

    So whilst Which? point out that 2.75% (infact it was 2.76%) is the top end, this spins into ‘well cap at 0.5% rather than charges of 2.75%.

    Nonsense.

    Though it of course does get Which? a load of free publicity.

  6. I forgot to ask: what’s the charge for a higher rate tax payer drawing additional income of £100k from their drawdown pot?

    A: 40% initial tax charge- perhaps more

    Sorry for the sarcasm, but fosussing on such a ridiculous example as Which?’s makes my blood boil.

  7. This shouldn’t come as a surprise really – on the face of it why should someone pay 75bps whilst accumulating their pension and then 200bps in decumulation? This would provide plenty of room for advisers to charge for their advice – it is the product and the investment that is being capped.

  8. @ Bert – The point is that nobody has to pay 200bps for a drawdown product and investments if they don’t want to. You can easily find a basic drawdown arrangement that will charge less than 75bps, including the investments. You won’t be able to do anything very fancy with it and the range of funds at that price will be limited, but if cost is the big issue, people have options.

  9. @Paul

    Did you find the report itself? I couldn’t find any of the underlying data.

  10. Is this product charging, adviser charging, fund charging or all 3? How will one-off fees be factored in? Will this only be for non-advised products? Will this cap apply to SIPPs and SSASs or just PPs/Stakeholders? Will this supersede existing product charges – based on an open/fair market – or will it apply to new products only?

    I support the idea of a NEST style scheme (in principle) for people who plan to drain their fund as soon as possible. But people can’t manage a 25 year drawdown contract based on cut-price charging and no advice.

    I love the quote from Which?: I’m pleased they have confirmed that if something is cheaper you are *guaranteed* to be better off. That’s why I use an odd-job man to do all my electrical work.

  11. Actually I do support this idea to a point. I am still coming across charges which frankly I cannot believe the adviser has the front to charge.

    There should be a decency limit.

    I recently advised and secured a half a million pound pension draw down, after I had quoted for the work he showed be and told me the other quotes. One adviser had quoted £15,000 plus 1% on going fee. I am sorry this is bull, this is why such rules have to be imposed.

    The problem with small pots is that the cost to advise, arrange and most importantly the LIABILITY is the problem. We are thinking very hard about refusing to advice on small pots to draw down as we see this as the next PPI, so this could blow up in Which and Labours face.

  12. David Cockling 1st April 2015 at 3:19 pm

    @Martin Evans. Perhaps, among other reasons, you secured the client was because the other adviser was overcharging? If so, that would be the a sign of the free market working as it should do. Does it really need any intervention?.

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