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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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.
Katie Binns is an award-winning journalist, and former Sunday Times writer where she spent 10 years covering news, culture, travel, personal finance and celebrity interviews. She has also written for the Times, Telegraph, i paper and Woman and Home magazine.
Her investigative work on financial abuse has examined the response of banks, the Financial Ombudsman and the child maintenance service to victims, and resulted in a number of debt and mortgage prisoners being set free.
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
By Dr Matthew Partridge Published
Can Lidiane Jones be Bumble's perfect match?
Dating app Bumble is taking on Lidiane Jones, a well-regarded leader in tech, as its new boss. Can she work her magic in a new arena?
By Jane Lewis Published
How to cut the cost of home insurance
Home insurance policies are becoming increasingly expensive, but there are several ways you can keep costs down.
By Ruth Jackson-Kirby Published
Are lifestyle funds still fit for purpose?
Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
By David Prosser Published
NatWest-owned Ulster bank boosts easy access savings rate to 5.2%
Rates on easy access savings accounts have hit over 5%, with Ulster Bank now giving savers the chance to earn 5.2% on their cash savings. We have all the details.
By Marc Shoffman Published
Moneybox raises market-leading cash ISA to 5%
Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
By Ruth Emery Published
October NS&I Premium Bonds winners - check now to see what you won
NS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
By Kalpana Fitzpatrick Published
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
The best packaged bank accounts
Advice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
By Tom Higgins Published
Energy bills to fall 7% under new price cap
Energy bills could fall by an average 7% from October under the new Energy Price cap announced today. We explain what the new cap mean for you and when it will come into play
By Pedro Gonçalves Published