Am I paying too much for my drawdown plan?

Posted By: Phil Handley DipPFS AwPETR On December 7, 2018 Category: Drawdown Providers Pension drawdown

It’s one of the questions I’m most asked. Am I paying too much for my income drawdown plan? Is it good value? Is there a cheaper options out there?

There are many ways to take an income at retirement, but income drawdown has seen a surge in demand since the pension freedoms. Where annuities were once king, Drawdown has now stolen its crown.

The complexity of choosing a drawdown provider and group of funds hasn’t got any easier though in the last few years. Some say it’s become harder, with access to more choice and an evolving product range.

Many people have decided to try choosing and manage a drawdown plan by themselves, the DIYers. These people for the most part have some investment experience and can, therefore, understand the different products available and can maybe put together a diversified portfolio. However, for manyDIYers, this is the first venture into investment and can be somewhatoverwhelming.

Cost’s vary wildly for both the Product Provider and the Fund Management.

The Product Provider is the company who administers your pension. It’s the ones who send you your paperwork and provide online access. Typically, you should be paying no more than 0.25% for this, however the range can be 0.10% to 1%.

The Fund Management Charge is levied by the fund managers of your portfolio investments. Depending on who you chose these can range from0.10% to 1.75%. There are Active and Passive Fund managers, Tracker Funds and Prebuild Risk Rated Portfolios. Unfortunately, higher management costs doesn’t result in better performance.

On top of this there are adviser charges, again these vary but typically are from 0.5% to 1.1%.

The key to understanding whether you are getting good value from your annual cost outlay is not always immediately obvious. If the markets are going up, you might be happy, but if your funds aren’t going up as high as the rest of the market you’re losing out.

To understand whether your funds are performing better than the market average can be somewhat labor intensive, but a good place to start is Trustnet. Find your fund and look at the Quartile Ranking over the last 5 years. Quartile 1 means your fund has performed in the best 25% of similar funds in the market, Quartile 4 is the bottom25%. Look at where it has been over the last 5 years at various points. We’relooking for consistency here so one which has been consistently in the 2ndQuartile is better than one which is currently in the 1st Quartilebut has been in the 4th Quartile for the rest of the time.

If you fund isn’t performing, maybe it’s time to look for another in the same sector. Trustnet allow you to search for this and also provides information on annual costs.

To find a lower cost produce provider again can be overwhelming. There are around 100 providers of drawdown and they all have differing charging structures. Most have a tiered system whereby they’ll chargex% for the first £x and then x% for the next £x and so on.

The larger, more well-known providers tend to charge more. Standard Life, Scottish Widows etc are household names and they know it. Thereis a premium to be put on reputation and this is evident in their pricing.

There are many online SIPP providers however that offer much more competitive charging structure. SIPP tend to only charge for the parts andservices of the SIPP you’re using, which can help to reduce costs.

Another popular way to reduce ongoing costs is to stay in house. Many providers offer a prebuild portfolio from their inhouse funds. An example is the hugely success Royal London Governed Portfolio Range. TheProvider is Royal London and the Funds are Royal London’s. These are only currently available through the use of a Financial Adviser but typically you can have a managed portfolio for around 0.6% (not including ongoing adviser charges).

By keeping all the moving parts in-house, providers can offer a more cost-effective solution. Many of the more established pension companies offer these and more SIPPs are starting to offer this solution.

If you’re in a position that you feel your paying too much to your adviser and are not seeing value. Moving to a new adviser is both painless and can save you thousands. I recently move a client over to my and saved him £7,000 in charges per annum. He was so please he referred his friend who I also save £4,500.

The trouble with trying to determine if you’re paying over the odds for your drawdown plan is that there are many moving parts to measure. If you have the time to research the market both for products and funds, the information is all freely available. If you don’t have the inclination or time. My advice would be to find a good financial adviser. Understand their costs first and what’s they’ll do for you, then let them do all the leg work and come back to you with a proposition.