How to get the best deal from your pension drawdown

Regulators struggling to persuade people to take independent financial advice when choosing a pension drawdown provider hope a new price-comparison service might help. The new tool, managed by the government-funded Money Advice Service, went live earlier this month. It enables savers considering drawdown plans to compare the cost of such schemes. The Financial Conduct Authority (FCA), the City regulator, asked the service to set up the tool amid concern that large numbers of pension savers who take out drawdown plans on reaching retirement are not receiving any financial advice. Its work suggests the typical saver could increase their retirement income by as much as 13% a year simply by shopping around for a better deal.

However, the new tool currently features drawdown plans from only eight providers. Another ten or so are not listed. This is either because these firms have opted not to take part, or because their products are not eligible. The service only covers drawdown providers taking part in the FCA’s new investment pathways initiative, under which savers are offered default investment funds according to a basic assessment of their circumstances and risk.

An incomplete picture

With so many providers not included in the Money Advice Service’s tool, pension experts warn that savers relying on its recommendations may be missing out on better deals elsewhere. The tool itself underlines what is at stake, with the cheapest drawdown providers charging thousands of pounds less than their pricier counterparts. Indeed, research published last year by the consumer group Which? found that the difference between the cheapest and most expensive drawdown plans for a £250,000 pension was £12,300 in charges over a 20-year period.

The broader criticism of the price-comparison service is that cost should not be the only determining factor in savers’ choice of drawdown plans. The schemes are complex products, with savers treading a fine balance between taking an income on which to live during retirement, investing to preserve and grow their capital, and ensuring their money lasts for as long as they need it to. Several factors come into play, from the investment options available through a drawdown scheme to the support providers offer as savers make key decisions.

This is why the FCA urges savers coming up to retirement and considering drawdown to take specialist financial advice. But it knows that many savers are not heeding its calls. The Money Advice Service’s price-comparison tool is the latest imperfect solution to that problem.

Mixing annuities and pension drawdown plans

The choice for savers at retirement is usually presented as binary: they either use their pension funds to buy an annuity offering a guaranteed income for life, or they take out a drawdown plan, leaving their savings invested and drawing a pension income directly from it. 

Increasingly, however, financial advisers are arguing in favour of a hybrid approach that combines the two, something that is entirely in line with pension rules. 

The idea is simply that savers use part of their pension funds to buy an annuity income that covers their basic living expenses in retirement; this guarantees their financial security. 

The rest of the fund is then moved into a drawdown arrangement and invested as the saver sees fit. They can draw income as and when they need it – for big-ticket purchases or travel, perhaps – but the rest of the fund remains invested, hopefully appreciating over time, and remaining available to heirs.

This approach clearly only suits savers with larger pension funds – enough to pay for an annuity to cover the basics and have cash left over. But it is becoming increasingly popular among financial advisers. One survey suggests a fifth of advisers suggested this approach to at least some clients last year.