Choosing the wrong pension drawdown provider to access your pot could wipe thousands of pounds off your savings due to high fees compared to picking the best provider.
In the same way most people compare car insurance or broadband deals to get the best price, it’s also worth shopping around for pension drawdown.
The government-backed MoneyHelper’s price-comparison service might help, which enables savers considering drawdown plans to compare the cost of such schemes. About 50,000 people have used the tool since it launched in 2021.
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The Financial Conduct Authority (FCA), the City regulator, 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 MoneyHelper tool does have its drawbacks. It currently features drawdown plans from only 10 providers. Another 10 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 investment pathways initiative, under which savers are offered default investment funds according to a basic assessment of their circumstances and risk.
Compare pension drawdown plans and charges
With so many providers excluded from MoneyHelper’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 in 2022 by the consumer group Which? found that the difference in growth between the cheapest and most expensive drawdown plans for a £260,000 pension pot was nearly £18,000 over a 20-year period.
The broader criticism of the tool 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. MoneyHelper’s price-comparison tool is at least a step in the right direction, and comparing some providers is arguably better than blindly using the drawdown service offered by a saver’s current pension provider.
Combine drawdown and annuities
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 beneficiaries.
Other 'hybrid' drawdown and annuity strategies include:
- Fixed-term annuity until state pension age. This can provide a guaranteed income for a set period, normally between three and 20 years, after which you decide whether to buy a different type of annuity or take a variable income or a lump sum from the amount returned to you.
- Drawdown first and annuity in later life. This allows you to wait to see if annuity rates improve, and potentially take advantage of better rates if your health deteriorates as you grow older.
These approaches clearly only suit savers with larger pension funds – enough to pay for an annuity to cover the basics and have cash left over. But they are becoming increasingly popular among pension savers.
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