Research has found some pension providers may charge you up to 10 per cent of your pension pot just to access the money. This in turn could severely restrict your retirement options. How can a financial adviser help you avoid this trap? Article by Nick Green
We’ve all been there. You’ve walked half a mile in the rain to find a cashpoint, only to see the message onscreen: THIS MACHINE CHARGES FOR CASH WITHDRAWALS. It never fails to provoke a special kind of outrage – we feel that we shouldn’t have to pay to get hold of our own money.
Most pension providers agree with this sentiment, and so won’t charge you any fees for accessing or transferring your pension. However, research by Citizens Advice found that 41 per cent of people accessing their pensions in the past year have been hit with some sort of charge for doing so. Those who paid these ‘exit’ or ‘transfer’ fees faced an average bill of £1,577, and people with smaller pension pots (£20,000 or less) paid an average of £1,966 – around 10 per cent of the value of their pot.
Missing out on pension freedom
Losing up to a tenth of your pension savings is bad enough. But the knock-on effect of exit fees can be even more severe. Back in April 2015 pension freedom was introduced to give people more choice over how they take their income in retirement. But finding the best options will in many cases mean switching providers and shopping around for the most suitable products and deals. If people face losing a big chunk of their pension by switching, they are more likely to stay put – thus seriously limiting their options.
The research indicates that this is exactly what’s happening: one in six people who have tried to use their pension freedom have ended up sticking with their current provider so as not to face exit charges. But it is very unlikely that these individuals will end up with the best products for them, being effectively hostage to their current providers. By failing to secure a competitive deal, they are likely to lose more money in the long term than they would have by paying the exit fee.
Switching pension providers
So what is the answer? Do you grit your teeth and pay the exit fee now, in the hope that a better annuity or drawdown scheme will pay you back the difference over time? Or do you shrug your shoulders and accept whatever your provider feels like serving up?
If you’re already at the point of retirement, the decision may be a very hard one. However, generally speaking it is usually worth your while to switch. After all, providers who offer truly competitive products tend not to need exit penalties to keep your custom.
If you still have some years to go before you draw your pension, you are in a much stronger position. The bad news is that you will still have to pay any exit penalties imposed by your provider if you transfer to a different one. The good news is that you will have a lot more time to make up those losses by finding the best scheme for you.
Consolidating pensions
Many people acquire a number of different pension pots (e.g. from different employments). In the majority of cases it is best to consolidate these into one, if you can. There are exceptions to this guideline (such as when a pension comes with certain guaranteed benefits) so ask your financial adviser before taking any action.
The two biggest reasons to consolidate your pensions are investment performance and service charges. Some pension schemes perform vastly better than others, and some have far higher fees. Ask your adviser to identify the best all-round pension for you (either one you already have, or a completely new scheme) in terms of performance and charges, and then you can move all your small pots into one big pot. This has the added benefit of ensuring that you only pay one set of service charges, not several. Plus, of course, there will be less administration to take care of.
Assuming you are able to take this action, and take it early enough, then then resulting stronger growth ought to offset the effect of any exit penalties imposed when you transferred your pension(s). This also puts you in a stronger position for the next stage of retirement planning.
Making the right choices in retirement planning
Now that you have used an IFA to roll your pensions into one, you should now be ideally placed to take full advantage of pension freedom. It’s possible you may need to switch providers again when you come to draw your pension – because the best provider for building up your pension pot may not always provide the best retirement product for you. However, this should no longer be a problem, because your adviser will have made sure either that there are no exit fees this time, or that any exit fees are justified by the greater growth achieved.
Your adviser can help you find the best provider both at the accumulation (i.e. saving-up) stage of your pension, and at the point when you start to take your money out. There may even be a stage in the middle when you are doing both, if you are phasing your retirement and drawing benefits sometimes while continuing to pay in at other times. In every case, your life circumstances will have a bearing on the best choice of provider for you.
As you can see, there are many decisions to be made at every stage of retirement planning, each one of which can translate into a significant income difference over time. There is your choice of pension provider while saving up, your choice of funds under that provider (or your own customised portfolio, if you opt for a SIPP). Then there is your choice of how you take your pension – as an annuity, a drawdown scheme, a lump sum or some combination of these – and finally the choice of which provider will offer you the best product from these options. Making the right choice every time can save you many thousands over the course of your retirement; making the wrong choice just once can cost you.
If you are concerned about exit fees, poor performance or any other hidden pension costs, the one-off cost of a financial adviser generally proves the best value in the long run.
Nick Green is communications manager at Unbiased, the UK's favourite place to find advice you can trust. He has been writing professionally on finance, business and many other topics for over 15 years.
