Does Hargreaves Lansdown head of pensions research Tom McPhail have it in for Which? over income drawdown? And if so, why? I am moved to ask both questions after reading his response to a report from the consumer body calling for a cap on drawdown products.
The call for a cap from Which? last week was backed by research in which it claimed there were huge differences in charges between companies offering drawdown products.
Which? found several high-charging drawdown products, including one that charged 2.75 per cent. Compared with a product capped at 0.5 per cent, this means someone with a typical pension pot of £36,000 and drawing down £2,000 a year would be worse off to the tune of £10,300.
A more realistic 0.75 per cent cap would give them about £8,800 more over the course of their retirement.
Which? also called for the Government-backed provision of a “backstop” drawdown provider where so-called “disengaged” consumers who wanted to take money out of their pensions could be defaulted into.
Tom’s response to the call for reforms of the drawdown market was immediate: on the charges issue, he argued any call for a cap was premature. He made the point that his own company, among others, has hugely reduced its fees in this area.
Only last month, Hargreaves announced that from 6 April it will not charge new or existing customers for set-up, one-off or regular payments, or for changes to payments. This compares with previous charges of £295 plus VAT to set up a flexible drawdown scheme and £30 for each one-off payment.
Other firms to have cut their drawdown costs include Standard Life, one of the targets for Which?’s campaigning ire, as well as Old Mutual Wealth. Companies like Fidelity Personal Investing do not charge for these services, while Barclays Stockbrokers charges £75 plus VAT.
Tom’s conclusion was: “A charge cap threatens to strangle this new pensions market before it is even born, by stifling the investment and innovation it badly needs to deliver good outcomes for savers.”
But he reserved his greatest ire for the call from Which? for a default withdrawal provider. This, he claimed, was a “recipe for disaster”, adding: “Disengaged investors should probably either buy an annuity or take financial advice, or possibly both. Defaulting them into drawdown plans when they don’t understand the risks look like a recipe for disaster.”
On the face of it, this seems quite harsh, given that Which?’s report states such a backstop should only be used in extreme cases: “Should consumers not engage with their retirement decision, or should the market fail to provide real choice and good value, the Government should assess whether it should default consumers who don’t make an active choice to this provider.”
Moreover, the key point Which? is making is, post-6 April, many consumers will find themselves in situations where the “default” drawdown option will actually come from their existing pension scheme provider, who will charge what it wants.
Meanwhile, pensions minister Steve Webb remains remarkably blasé about the potential effects of his reforms. In a recent interview with The Observer, he said: “If you take your pot of, say, £30,000, and you do spend it over 10 years, have you run out early or have you exercised precisely the freedom we wanted you to exercise?
“You enjoyed it and then intend to live on your state pension and, perhaps, other savings. Is that the wrong outcome?”
Well, yes it might be, if being stuck on the state pension for the next 20 years afterwards was an unthought-through consequence of a decision reached with only a limited amount of information provided by the poorly-named Pension Wise guidance service.
No wonder Which? was last week joined by Labour leader Ed Miliband who promised a drawdown charge cap if his party wins the coming general election.
Hargreaves Lansdown knows genuine financial advice will not be available to the vast majority who will gravitate towards a drawdown option after 6 April. It also knows most retirees will probably stick with their provider for lack of better ideas on what to do with their pot of money.
So why is he so critical of Which? for saying so? A clue can be found in Hargreaves’ own research, which suggests between 200,000 and 400,000 people are waiting for 6 April, when an estimated £5bn could be withdrawn from pension savings into annuities, drawdown and ad-hoc cash withdrawals.
In other words, a wall of money, much of which may well stick with existing pension providers. But a large chunk will find its way to Hargreaves’ now-cheaper, advice-free scheme.
No wonder that in the days after Hargreaves announced its drawdown charges cut and the rationale for it, the price of its shares rose sharply and have carried on rising ever since, closing at 1,070p last Friday, up more than 10 per cent in the past three weeks alone.
Yes, there may be practical difficulties over calls for a backstop drawdown provider in particular. But Tom McPhail’s response suggests to me that his concern is as much about protecting his own company’s new drawdown proposition as it is about the solutions Which? is proposing to a crisis he knows is waiting in the wings.
Nic Cicutti can be contacted at firstname.lastname@example.org