AMC – Annual Management Charge
The headline rate, levied by the fund manager which is taken from the fund annually.
TER – Total Expense Ratio
Describes all the charges associated with a product.
OCF – Ongoing charges figure
Describes all the charges associated with a product but includes performance fees and one of charges. Be careful when looking at the ongoing costs of running a fund as the OCF will often be higher than the headline AMC. Telegraph
Many Drawdown scheme are provided through a SIPP or self-invested personal pension. These are tax efficient ways to hold your pension funds. They offer access to a wide range of investments from traditional funds, individual company share and commercial property to more diverse options such as Exchange Traded Funds (ETFs). They are a bit of a one stop shop, as they can hold a wide range of investments, unlike some provider in-house drawdown schemes (which can only hold their own funds).
Most people entering drawdown will look to diversify their portfolios. This means not having all their eggs in one basket. When investing, the safer strategy would be to spread funds around in;
- geographical regions of the world
- different sectors (Pharmaceuticals, manufacturing, utilities, oil & gas etc)
- Asset classes (shares, property, bonds, cash)
Investing in this manner, may not provide the best opportunity for maximum growth, however it will reduce downside risk to capital.
Some providers offer Model Portfolios, which are constructed to target a certain risk level. There are generally 10 risk levels, 10 being high and 1 being low. Some providers offer pre-constructed portfolios, which are aligned to these risk levels. The aim is to take the burden of choosing funds away from the investor. They will also keep a closer eye on the fund and any changing political or market forces, which may require a change to where the fund is invested.
Model portfolios are also offered by financial advisers.
Consolidating pensions into one fund.
I often get asked if it’s possible to move a number of pension schemes into one, before entering drawdown. There seems to be some myth that’s it’s not possible to do so. It can, and it’s the most popular way people amalgamate their pensions.
Emergency tax on large withdrawals
A complication of the pension reforms is the tax paid on large withdrawals from drawdown. Regular withdrawals are taxed at source and correctly, as HMRC know how much income will be withdrawn in one tax year.
Withdrawing large, one off lump sums however can be complicated. The revenue will treat a large one off payment as an expected future monthly income. Therefore, if £10,000 is withdraw in May with 11 month remaining of the tax year, HMRC would calculate the tax against an expected £110,000 annual income. Not ideal, but the tax can either be claimed back through various HMRC forms, or will be repaid at the end of the tax year.
Flexi-access drawdown, Pension Drawdown, Income Drawdown
They’re all the same thing, just different names used by providers/advisers.
If you die before age 75, your estate gets to spend your remaining drawdown funds without any tax liability, if you die after 75, they’ll be taxed on the withdrawals against their own income tax bill.
You can have your income whenever you want once in drawdown. It can be set up to pay regularly on a monthly, quarterly, bi-annual or annual basis. One of amounts can also be withdrawn without restriction (it will usually take around 20 days from the request to get paid however).
Discretionary Fund Management (DFM)
Traditionally, access to DFM’s were only for those with around £500 thousand and upwards, who wanted a personalised investment portfolio where the manager had discretion to pick any investments without the clients pre-approval. The advantage being decisions can be made quickly to the benefit to the fund. Today however, pension freedoms have now allowed access to DFM’s in the mass market (with lower value funds) through the use of model portfolios. These are pre-constructed groups of investment which meet certain risk tolerance levels.
There are additional charges to involve a DFM, but the model portfolio option can be used for as little as 0.2% with some providers.
Initial and ongoing adviser charge
If you arrange a drawdown plan through a financial adviser, they will usually mention two charges. The initial charge covers the advice, research, recommendation and administration of setting up the plan.
The ongoing advice charge is usually a percentage, taken from the fund on an ongoing basis. This covers any administration throughout the year, but also includes an annual review. This should be a assessment of your current situation annually, discussion about fund performance, risk tolerance and any alternate recommendation which my become more suitable.
Critical Yield A
This is often mentioned in drawdown illustrations and leads to the most confusion with my clients when they first view them. Critical yield A, is the percentage by which a fund needs to grow, to provide (and maintain) a similar level of income, that could be achieve by purchasing an annuity.
Investment funds are often categorised into various risk levels. This is to provide the investor, a snapshot of the potential volatility within the fund.
It’s important to understand how volatile your investment may be and your tolerance for capital loss. Understanding what your investments might do, shouldn’t lead to panic selling if they go down. You have to be prepared to accept some losses in the short term in order to seek out long term gains.
Promoted as having the flexibility of drawdown with the guarantee of an annuity, guaranteed drawdown is trying to fill a perceived product gap.
You can have a guaranteed lifetime income through these product, only if you accept the income they are offering, which might be less than you need, and certainly less than you could get if you buy an annuity outright. You effectively trade this off, to keep full access to your pension fund if you need it.
You also pay higher annual fund and product charges than traditional funds.
Financial Service Compensation scheme limits
In income drawdown it’s £50,000 per investment institution. If you have £150,000 in three £50,000 funds with Aegon, and Aegon fail, you only have £50,000 protection.
If you have £150,000 in a funds with three separate funds managers, Fidelity, Standard Life and Prudential for example, your full £150,000 is protected. Short lesson here, diversify your investment.
If you hold any money on the drawdown providers cash account, this is covered under deposit protection up to £75,000.
Uncrystallised Funds Pension Lump Sums (UFPLS)
A method of withdrawing pension funds, announced by George Osborne along with flexi-access drawdown, but largely shunned by providers who either didn’t chose to offer it or offered it with restrictions such as 2 withdrawals a year or minimum £5,000 at a time.