This post was written a few months ago but never published. The main thrust is still relevant, the thrust is that we are better off building better and more relevant products than trying to squeeze drawdown into a shirt two sizes too small.
Labour is calling for a cap on drawdown charges from April 2015. It is easy to see why.
Currently there is a false market for drawdown with many customers paying as much as 4% pa for the management of their money.
Here is a charging structure we recently came across that I am told by IFA colleagues is not unusual
Discretionary fund management charge from adviser 1.5%
Underlying fund costs 0.8%
SIPP platform charge 0.6%
Transactional charges – converted to an AMC assuming an £80,000 fund (at outset) – 0.8%
This adds up to a whopping 3.7% pa! This does not include the incidental costs of running the fund which are charged to the net asset value. We estimate these to be a minimum of 0.5% bringing the total cost of the drawdown to 4.2%.
The current maximum GAD drawdown for a 65 year old with £80k in his or her fund is 5.5% . If we were to deduct the estimated cost of running the fund from the GAD rate you can see that there is not much income to be drawn if the fund is not to be depleted at a disastrous rate.
The question is whether this charging structure is sustainable- not in terms of its fairness to customers (it is palpably unfair) but in a commercial environment where market forces should even out such imbalances between the buy and sell side.
For Labour, Government intervention has always been more palatable than for the free marketeers of the right. Gregg McClymont has every right to point to April 2015 when a surge of pension money will be crystallised either into drawdown or people’s bank accounts.
If anyone was asked to pay over 4% pa in charges on a bank account (when they will be getting less than 2% interest, then they would look another way!
Small wonder that many will be taking their money out of pensions and into accounts where they feel they are being treated fairly.
So it is entirely right for a future pensions minister to demand some parity- at least till the market catches up.
I personally don’t see need for Government intervention because (unlike the purchase of an annuity), money invested in a drawdown policy can be taken away and placed in a more efficient decumulation plan.
The argument for a cap on workplace pensions was marginal but ultimately sustained by the argument that people could not be auto-enrolled into plans which offered bad value because of the poor purchasing by others (employers).
The decision on what drawdown plan (or drawdown alternative) into which to invest is one that has to be the responsibility of the person with the pension pot. People have to engage , get educated and empower themselves to take sensible decisions and the intervention of a Government could actually slow this process down.
Even more importantly, it could stifle the natural development of products to meet the new demand.
A cap could become a collar, creating a false market where the maximum and minimum charges are adjacent.
So although I am with McClymont and the Labour Party in drawing attention to the poor state of the drawdown market and the asymmetry of value where the member seem to be heading for more “pension rip-offs@, I cannot support a solution as crude as a charge cap.
Instead , I suggest that Labour and the Coalition agree between now and April to investigate the state of the drawdown market with a view to naming and shaming those drawdown providers who are seen to be extracting the proverbial.
Meanwhile, those of us determined to build new product that decumulate collectively, can get on with the job of offering some proper competition in what appears to be a very uncompetitive part of the market.