How to get the best deal from your pension drawdown

If you're thinking of taking out a pension drawdown plan on reaching retirement, don't just rely on the Money Advice Service’s price-comparison tool.

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.

Recommended

We’re doing well on pensions – but we still need to do better
Pensions

We’re doing well on pensions – but we still need to do better

Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn S…
4 Jul 2022
The income investor’s dilemma
Income investing

The income investor’s dilemma

Pay attention to dividend growth as well as initial yield when picking income trusts, says Max King.
4 Jul 2022
How to boost your income as dividends come back in fashion
Income investing

How to boost your income as dividends come back in fashion

Dividends are back in fashion. But how do you go about building an income-generating portfolio?
4 Jul 2022
The transition to renewable energy is easier said than done
Renewables

The transition to renewable energy is easier said than done

We are on a path to “net zero” carbon emissions, says Edward Chancellor, but fossil fuels will be with us for some time yet.
4 Jul 2022

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022