Simplify shopping around for pension products

Pension products are complex and there is no easy way to compare deals. David Prosser reports.


Do your homework before you start
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Pension products are complex and there is no easy way to compare deals.

Although picking a drawdown product is far from straightforward, there are as yet no comprehensive online comparison tools to help with the decision. The goal of such tools would be to protect those converting their savings into retirement income, and to encourage competition between providers, according to financial regulator the Financial Conduct Authority, which is working on plans to make such services available.

Progress is long overdue. Almost three years after the pensions-freedom reforms made it easier for savers to draw an income directly from their savings in retirement, rather than buying an annuity, drawdown plans are hugely popular. But while more than three-quarters of people reaching retirement now opt for some form of drawdown, less than a third of them are taking independent financial advice before choosing a provider.

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The Association of British Insurers (ABI), which numbers many drawdown providers among its members, said last summer that it was working on an online comparison tool. But so far it hasn't been able to get it up and running, with insurers nervous about how to balance the need to offer a useful service with abiding by regulations that prevent them offering personalised advice.

Other attempts to help consumers are also failing. For example, a "retirement quality mark" launched last year by the Pensions and Lifetime Savings Association, which is meant to direct savers towards providers whose drawdown products meet certain criteria, has so far attracted only three providers. The government-backed Money Advice Service has only been able to publish generic advice for savers considering drawdown plans.

One difficulty is the complexity of the products compared with other financial services for which online comparison tools have been developed, with different types of plan suited to different objectives. The most basic drawdown plans are very different from products for savers who want to take a more hands-on approach to managing their money. Charges are also hard to compare, with different structures in use. Some plans look cheap because they display a headline fee for the wrapper in which savers' money is held, but levy extra charges for investments and even basic transactions, such as taking income.

What to think about before buying

For most people, taking independent financial advice on drawdown is the sensible option. But in the absence of a useful online comparison service, savers should at least consider the following issues before choosing a provider:

Investment choice: drawdown plans should offer access to a broad range of investment funds; some savers may also want extra investment options, such as the freedom to trade in individual shares, or to invest in more unusual assets.

Charging: compare drawdown charges carefully, taking the time to understand the different fees you may have to pay during the lifetime of the plan; you may be prepared to pay extra for certain facilities, but don't pay for what you won't use.

Flexibility: check there will be no penalties to pay if you decided to vary the income you're drawing down because your personal circumstances or needs change.

Service: look at how you will monitor and manage your drawdown plan, and what kind of support is available; if you need online access, for example, does the provider's digital platform meet your needs?

Advice: some providers enable you to access independent financial advice through the plan, meeting your costs from your savings.

Tax tip of the week

The government's tax-free childcare scheme has now been extended to parents whose youngest child is under 12, meaning eligible parents can receive up to £2,000 per child towards childcare costs each year (or £4,000 for a disabled child). The scheme has been available to the parents of disabled children and those under four since April 2017, and has gradually been rolled out to older children. For every £8 parents pay into a digital account, the government will top the account up by an extra £2.

To qualify, both parents or guardians must be in work and each earn less than £100,000 per year. Since the scheme launched, HM Revenue & Customers has received 3,496 complaints from parents experiencing technical issues with the website, reports It has paid out almost £1m to parents in lieu of the top-ups.

Savings cap drives doctors to their gardens

Stricter rules on pension savings caps are contributing to staff shortages in the National Health Service, the chief executive of NHS England has warned, with tough limits on how much people can build up in their retirement funds leading to doctors retiring early.

Many doctors were able to build up pension rights worth £1m by their mid-50s. As a result, they are now in danger of breaching the lifetime allowance the government's lifetime cap on pension savings, says NHS England CEO Simon Stevens. Pension savings above this allowance are subject to tax charges when they're cashed in.

The £1m figure affects relatively few savers with defined-contribution pension plans (where the pot grows in line with the returns achieved on the money invested). But in defined-benefit schemes such as the NHS Pension Scheme, a formula is used to work out what an employees' pension rights are worth; higher earners in such schemes are significantly more likely to hit the lifetime allowance.

While there are ways to mitigate the risk of higher tax charges, including opting out of private pension schemes and making no further savings, NHS bosses have warned that the problem is a contributory factor in the large number of doctors who are retiring early. Among GPs, for example, the average age of doctors drawing their pension for the first time has fallen from 60.4 in 2011 to 58.5 today, according to research carried out by Pulse magazine.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.