Flexible pension may end up costing retirement savers as much as the poor value annuities that they are designed to replace, suggests independent research.
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Fees and charges for setting up and managing a new flexible scheme from April 6, 2015, could wipe out up to 27% of a typical small pot retirement saver’s pension, according to figures released by the House of Commons Library.
The research team is an independent service for MPs which was asked to look at how pension firm charges could impact on a £30,000 fund over someone’s retirement.
A flexible pension is designed to remain invested with funds available for drawdown as and when the retirement saver wants.
The first 25% of each drawdown is tax-free and income tax is charged on the balance at the highest rate the pensioner pays tax.
Most small pot investors would expect to pay tax at the basic rate of 20% or less, so drawing £10,000 would mean no tax on the first £2,500 then a 20% bill on the remaining £7,500.
That leaves a £1,500 tax bill and the £8,500 balance going to the pension saver.
However, the library research found besides any tax due, a flexible pension could be subject to losing a massive slice to fees and charges.
A study by The Telegraph shows on average, financial firms will charge around £300 to set up a flexible pension, then £400 a year to ‘administrate’ the pension and a £30 per withdrawal charge.
On top of that, some firms are also proposing a 1% fund management fee; even though the government’s new automatic enrolment pensions have fees capped at 0.75%.
Call for fee cap
The library produced the figures for the Labour Party, which is now calling for a cap on flexible pension charges.
Labour’s shadow pension secretary, Rachel Reeves is backing a review by the Cass Business School which is tasked with looking at how pension savers can maximise their retirement income.
“We want to focus on how to make pensions better for everyone,” said Professor David Blake, of the business school.
“The study will look at the likely future for auto-enrolment, but also how to get the best consumer outcomes for people retiring under the new flexible access pension rules.”
Recent figures published by the Association of British Insurers revealed that the number of pension savers going into drawdown increased by 123% year-on-year in the last quarter, from just over 5,000 to more than 12,000.
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